Here Are Eight Ways the Wealthiest People in the U.S. Avoid Paying Taxes.

Have you ever heard that Warren Buffett, who is worth a lot of money, pays less federal income tax than his secretary? That’s right. He’s not the only one. Many wealthy American households pay surprisingly low tax rates, and in some cases, they pay no taxes at all. They do this legally by taking advantage of some of the best tax breaks in U.S. tax laws.

The best thing is that you can learn from many of them and use what you know. There are no tax breaks that only help billionaires.

There are eight ways the rich avoid paying taxes.

1. Unrealized cash gains are not taxed.

The main reason why most billionaires pay surprisingly low taxes is that many of them don’t make much money. Their money is instead tied to stocks and other investments. No matter how much your assets have gone up, you don’t have to pay taxes on them until you sell them. This is called “unrealized capital gains,” it can be a great way to put off paying taxes on investments that did well in your trading account.

2. Tax breaks for donations

How does it work that Buffett pays less in taxes than his secretary? The truth is that he gives billions of dollars’ worth of Berkshire Hathaway stock to charity every year, and as he is allowed to, he gets a tax break for some of these gifts. This means that half of his pay is no longer taxed. Even though you and I are unlikely to have a charitable benefit equal to half of our income in any given year, taxpayers who itemize can get a nice break for their kindness.

3. Rates of long-term capital growth

A large part of a billionaire’s income comes from investments, both in the form of capital gains from investments they sell and dividends from stocks they own. Most dividend income and profits from investments kept for more than a year are taxed at much lower rates than regular income.

4. IRAs

Peter Thiel, a billionaire, started a Roth IRA and put shares in the company that would become PayPal in the account. This is a story that stands out. The performance ended up being worth $5 billion, and Thiel won’t have to pay any taxes on anything he takes out of it because Roth IRA payments are tax-free.

5. Income that is passed on

As part of the Tax Cuts and Jobs Act, enacted in 2018, pass-through income (like income from an LLC or partnership) gets a 20% tax break. Many rich people own their businesses, so this helps them. It also allows people with pass-through income from small businesses and self-employment income.

6. Tax breaks for people who buy homes

Homeowners get some extra tax breaks. If they itemize, they can subtract their mortgage interest and property taxes. Wealthy people sometimes try to get around this rule, like when they deduct the interest on a yacht loan because it legally meets the definition of a second home. But the tax break for home interest saves money for millions of regular Americans every year.

7. Deductions for medical costs

If you itemize your taxes, you can subtract medical costs that are more than 7.5% of your adjusted gross income (AGI). People have been able to use this to claim that their expensive swimming pools are “therapeutic” devices, but anyone with high medical costs can use this discount.

8. Tax breaks for people who invest in real estate

There are a lot of tax breaks for investing in real estate, and depreciation is a big one. If you buy a rental property, you can deduct a part of the price you pay for it yearly from your taxes. Most of the time, this means that rental homes that make money show a loss on their taxes.

In Conclusion

As a final thought, it’s important to note that these and many other tax tactics have a lot of grey areas. So, if you need to figure out if a specific deduction or credit applies to you, getting help from a tax expert who can look at your particular case is a good idea.