You’ve heard it before, the rich get richer and the poor get poorer. In fact, we made a whole video about it! And there are a lot of reasons why that’s absolutely true. However, in this article, I want to talk about taxes, and how the rich and famous somehow get away with barely paying any.
Yes, it’s true that we have a tiered tax bracket system here in the United States. And, technically, richer people should pay way more in taxes than poor people. But, in case you didn’t know, it doesn’t end up working out like that a lot of the time.
You heard how Donald Trump only paid $750 in taxes in 2017? Well, he may not have broken any laws in doing so, because there are a whole lot of loopholes in our tax system that make it super easy for rich people to hide their wealth away and not have to pay tax on any of it. This is how the rich and famous hide their money! Let’s go!
Shell Corporations – Mailbox Companies
Now, when most people hear the term “shell corporation,” the red flags start going up in their heads and they automatically assume something illegal is going on, but that’s just because you’ve probably watched too many movies.
If you’re among the 1%, you know that shell corporations can be a great way to shelter your wealth that’s completely within the law. A shell corporation is quite simply a company that holds financial assets and engages in certain transactions but doesn’t really have any business operations. They don’t produce anything, they don’t sell anything, and they don’t have any employees. Essentially, they’re just a mailbox and a bank account.
In theory, there’s absolutely nothing illegal about starting a shell corporation; however, because shell corporations are often used to hide the identities of the people who started them, they’re used to conduct illegal transactions in a lot of cases.
But, sometimes rich people will start a shell corporation simply because the corporate tax rate is lower than their income tax rate, and so by filtering their wealth through a shell corporation, they can save themselves millions in taxes. You can also set up a shell company in a tax haven country like the Bahamas or the Cayman Islands where corporate tax rates are literally nothing and avoid paying taxes altogether.
Here’s an example: instead of paying personal income taxes on your income, you filter all of your business operations through a shell corporation in the Bahamas. This shell corporation holds all of your financial assets, and since it’s a corporation, you don’t have to pay any taxes on it to the government of the Bahamas.
And since corporations can have real estate holdings, you start buying up a bunch of property in the United States through that Bahamas-based corporation. Plus, the Bahamas also protects the identities of those who start corporations in their country, so the IRS has no idea how to identify you as the owner of that real estate or of that corporation. Essentially, you just bought up a bunch of real estate assets that are going to appreciate in value, while also avoiding any personal income taxes in the United States. And guess what? You did it in a 100% legal way!
Yeah, it’s pretty wild to think that the IRS can’t really do anything about that, but it’s true, and that’s what rich people do all the time!
Another place where rich people tend to send their wealth is not overseas, but right here in the United States to their friends and family.
Financial Gift Giving – Mafioso Style
So, this whole thing sort of sounds like something out of a mob movie like Goodfellas or The Godfather, but basically, the IRS allows you to give $15,000 tax-free per year to as many individuals as you want, and it’s considered a gift.
But, if you trust those people, you can really just have the hold on to that money for you and pay lower taxes on it than you would. That just reminds me of Tony Soprano giving people envelopes of money and telling them to hold onto it for him.
Think about this. You could give $15,000 each of your four children, none of who have a job and pay pretty much nothing in taxes, and then use that $60,000 to buy a Land Rover. Who’s going to stop you from driving that Land Rover to work or to the grocery store whenever you want?
Want to hide some more money from the IRS? Give it to your grandma, your wife’s mother, or your second cousin. And it doesn’t even just have to be your family. If you have close friends that you trust with your money, you can give $15,000 a year to pretty much anyone you like. If they’re in a lower tax bracket than you, it could end up saving you a bunch of cash.
And while throwing $15,000 at everyone close to you is something you can only do when you’re rich, this next tax avoidance strategy is something that can be helpful to anyone, regardless of how much money you’re bringing in.
Retirement Accounts – Tax Havens for Everyone
If you’ve ever watched any of our YouTube videos, you may have heard us mentioning Roth IRAs quite a bit. But Roth IRAs, and IRAs in general, aren’t just for normal people like you and me, the ultra-rich will also put their money into IRAs to avoid paying unnecessary taxes on them. And if the ultra-rich are doing it, it’s probably because it’s a smart financial decision.
Essentially, you can contribute up to $6,000 per year to an IRA account, and the IRS will give you a free pass on taxes. Well, sort of. All IRA accounts are completely free from capital gains tax. So, if you invest the money you put in an IRA into stocks or something and it quadruples in value, you still only have to pay income taxes on the amount that you contributed and you won’t get taxed on the gains.
Roth IRAs basically have you pay taxes before you contribute money and traditional IRAs have you pay taxes when you take the money out of the account. So, if you think you’re going to make more money in the future and move up in the tax bracket by the time you retire, you should go with a Roth IRA. If you think you’ll move down in the tax bracket, you should open a traditional IRA.
This is an easy and completely legal way to avoid paying taxes on your investment gains, which is why rich people love it just as much as normal people do.
But while retirement accounts in the United States offer some tax benefits, keeping your money offshores can help you avoid taxes altogether, as we saw with shell corporations. Don’t want to go through the trouble of filing a corporation? No problem. Open an offshore bank account.
Offshore Bank Accounts – The Wolf of Wall Street
If you’ve seen The Wolf of Wall Street, you probably remember how Jordan Belfort was keeping a ton of his money in a bank account in Switzerland. The reason he was doing that was, for one, a lot of that money was the result of illegal practices. And two, because he didn’t want to pay any taxes on it.
Rich people really do open offshore accounts to avoid paying taxes in the USA, it’s not just for movie characters. And while this practice moves into illegal territory quite a bit, there still isn’t much the IRS can do about it in some cases.
You see, there’s nothing illegal about having an offshore bank account, but it’s very much illegal not to report the money that’s in that account to the IRS. For a while, rich people were sending their money over to Switzerland because Switzerland had very strict secrecy laws that allowed people to open bank accounts that didn’t have their names attached to them. And that basically made it impossible for the IRS to track whose money was going over to Switzerland.
Today, the World Trade Organization requires all countries to report banking information from foreigners to that person’s home country, and Switzerland is now in compliance with that. No more Swiss tax haven banking. However, there are still countries out there that don’t comply with the WTO’s mandate, which means that you could technically send your money over to a bank account in one of these tax haven countries, pay little to no taxes on it, and the IRS wouldn’t really have any way to find out where it went.
To be clear, I’m not saying anyone should do that, because it’s highly illegal. I’m just saying that that’s what rich people do sometimes, and have been doing for many, many years.