Tax Day 2013: 10 Ways the Wealthy Dodge Taxes


Have you always wanted to know how the wealthy in America avoid paying their fair share? Even if you haven’t, you should probably know of these 10 common ways the rich dodge their taxes. 

1. You Can’t Pay Income Tax if You Don’t Have an Income.

You lucky wealthy wrascally rabbit you. People like Mitt Romney don’t pay an income tax because they don’t technically make an income. What qualifies as an income? For most Americans it’s their salary and any bonus they make. For wealthy people, they are most likely to pay themselves through carried interest. Carried interest is a share of the profit from the project or company that is given to the general partner. This interest is taxed as capital gains, not income. 

2. Investment Managers Are Taxed At a Different Rate Than You. 

Managing a hedge fund is perhaps one of the best ways to avoid paying what Americans would commonly think of as traditional taxes. If you think about who constitutes the wealthy in America who do you think of? Private equity funds, hedge fund managers, and real estate conglomerates. Again it comes down to what we talked about above. Carried interest. The owners or managers of investment funds pay themselves little salary. That means that instead of being taxed at a rate of 39.6% the majority of their money is taxed at 20%, which is the capital gains tax rate. This explains why Warren Buffet is taxed at a lower tax rate than his secretary. 

3. If You Don’t Sell Your Assets, You Don’t Pay Taxes.

What does that mean? The wealthy don’t have to pay taxes on their assets (paper or real estate) until they sell them. If my wealth increases exponentially because I hold lucrative assets (such as a fracking business) I will never have to pay tax on that asset unless I physically sell it. I can even pass down all of my assets to my spouse without ever having to pay tax on them. 

4. Charity, Charity, Charity, or Something.

It’s not just in the U.S. that this happens, it’s a pretty popular way to avoid paying taxes around the world. How does it work? Just donate some of your property or your assets to a charity, and you’ll never have to pay taxes on them. Are you thinking this is a good thing? Well, what about fake charitable organizations set up by a third party whereupon assets are then “donated” but they don’t actually go to a real charity? That fake charity then just serves as a shell for tax avoidance. Huzzah. Now that’s philanthropy! 

5. Oh Yeah, We'll Expense This.

One of the most popular ways to avoid taxes is to use the ol’ expense rule. Corporate expense accounts exist for a reason, and a very good one at that. While we personally cannot deduct our transportation costs to work, people who use a corporate jet can. How? It’s considered a business expense

6. Rules, What Rules?

Tax shelters exist for a reason. If the U.S. hasn’t declared the island you are stashing your cash on as a tax shelter, stash away my friend, stash away. The worst thing that can happen to you if you are guilty of this? You have to pay back taxes. 

7. Tax Lobbyists-Not Working For You, Ever.

Oh what, you don’t have your own team of personal tax people lobbying the government  to insert special rules and breaks for you? Well, that’s okay, there are about 17,500 tax lobbyists already. The only bad thing is, they aren’t working for you. Unless you happen to be an ethanol or oil producer ...

8. Tax Code, Confusion with a Purpose.

You remember when all of those Congressional leaders call for a simplification of the tax code? Have you ever wondered if they actually mean that? Why if we had a simpler tax code an entire industry would be out of business. Literally. The tax industry employs nearly 3 million full time workers. Economic stimulus indeed. 

9. Own a Yacht.

If only I had kept my vacation property and my yacht. If you are lucky enough to have one or both of these things, well you can deduct the mortgage interest payments on them. How does that help you avoid paying taxes? It reduces the amount of income tax due. 

10. Get a Nice $101 Million Dollar Nest Egg. 

Individual Retirement Accounts are a great way to avoid paying taxes. How so? For example, Mitt Romney’s IRA account holds about $101 million dollars, tax free. That is despite there being limits on how much money can be put into these accounts per year. Individuals are capped at $5,000 but if you are a business you can invest up to $50,000 per year under a Simplified Employee Pension Plan.