Tax Tricks: 5 Methods Ultra-Wealthy People Use to Avoid Paying Tax

taxes on investments

While you diligently complete your tax return online and pay whatever you’re told you owe, the world’s richest billionaires are sailing off into the sunset with $0 tax bills every year. How is this possible? They apply the tricks to avoid paying tax as described below:

1They borrow instead of earning

As the CEO of a successful company, your wealth can grow each year without creating a taxable event. All you need to do is remain invested in the company. Any gains made in share prices won’t be taxed until you sell those shares. Then, instead of taking a wage, which would incur income tax, you simply borrow the funds you want each year, using your massive invested wealth as collateral. Given the insanely high net worth billionaires boast, they can often access loans at interest rates as low as 1%.

2They offset capital gains

Since billionaires tend to have massive investment portfolios, it’s generally easy for them to avoid paying capital gains, even when they do sell shares. All they have to do is sell off enough losing investments to counteract the gains on paper, and they can avoid paying tax that financial year.

Known as “tax loss harvesting,” this tactic can be applied by people in lower tax brackets too. Get this step right, and you can even carry any unused losses over to future financial years.

3They use family trusts to distribute wealth

When you have a family trust, you can distribute income and losses across multiple people, allowing you to take advantage of everyone’s tax-free threshold. By controlling the distribution of assets and splitting income up into the most tax-efficient way, billionaires can slash an astonishing amount from their tax bills.

On top of the yearly tax benefits, trusts can help the mega-rich pass on their wealth without incurring the otherwise substantial inheritance tax. From dynasty trusts to trust freezing, there are plenty of strategies you can deploy to dodge the taxman – you just need to be wealthy and in the know.

4They send their money overseas

Many countries around the world have ridiculously favorable tax laws. That’s why many billionaires set up businesses and shell companies in places like Bermuda or the Cayman Islands. Current estimates suggest that around $21 trillion is currently housed in tax havens, hidden safely from the prying eyes of the IRS and other tax agencies.

The beauty of tax havens is that they’re generally small, remote, tropical paradises. So, it pays in more ways than one to have your money and your “business” hanging out there. Some of the most popular tax havens include Nauru, Mauritius, Curacao, and the British Virgin Islands.

5They buy sports teams

If you thought billionaires were buying sports teams for the love of the game, you are going to feel a lot more jaded about the world after you read the next few sentences. The truth is that sports teams offer such a rich abundance of tax write-offs that their owners generally end up paying less in tax than the players on the team. In fact, ProPublica investigated this tax trick and found that even the minimum-wage employees at one baseball field were paying more tax than the owner of the local team.

Though these tricks have a 100% success rate for billionaires, most of them are unfortunately out of reach for the rest of us. The system may not be fair, but it certainly is fascinating.