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7 Ways To (LEGALLY) Avoid Taxes | Tax Loopholes Of The Rich



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imagine this you were just hired as the

president of Intel your starting salary

is $1,000,000 per year you pick up the

phone and call your family to give them

the good news that you are finally a

millionaire well not so fast with all

this excitement you forgot to consider

the hard reality of making money in

today's social economic world taxes with

1 million dollars in earned income you

will have to pay over $300,000 in

federal taxes $29,000 in Social Security

tax over $100,000 in state taxes

assuming you live in California where

the company headquarters is located this

means that out of your million dollar

salary you will have to pay four hundred

and sixty eight thousand five hundred

and ninety dollars in just taxes this is

over 46 percent of your total income

gone to taxes and there is very little

you can actually do to change that and

if you try to evade taxes you can end up

with a fine up to two hundred and fifty

thousand dollars on top of what you

already owe so much for being a

millionaire but wait a minute if the IRS

doesn't joke around with their taxes why

do we keep hearing about wealthy people

and companies not paying there's some of

America's biggest companies reportedly

paid no federal income tax billionaire

Donald Trump pays no federal income tax

that massive company paid no federal

income tax this got me curious what if

these guys do differently to avoid taxes

without any consequences from the IRS

well as it turns out the tax code can be

a little complicated and some of the

wealthiest people in the world found a

few loopholes to keep their money away

from Uncle Sam's pockets one of the most

simple yet fastest ways to start saving

money in taxes if you already have a

good business is to turn your sole

proprietor business into a corporation

because these two are taxed very

differently when a person does a

business as a sole proprietor they are

combining their own personal finances

with their business finances and their

business income will be text just like

earned income which can go up to 37%

just for federal taxes alone so if you

made a million dollars a year as a sole

prior to you will be on the hook to pay

up to three hundred and seventy thousand

dollars in just federal taxes but if you

are a corporation you will only have to

pay two hundred and ten thousand dollars

in federal taxes since the corporate tax

rate in the u.s. is 21% becoming a

corporation will automatically save you

one hundred and sixty thousand dollars

in federal taxes for that million-dollar

year and this number used to be higher

in Trump's presidency corporate taxes

went from thirty five percent down to

twenty one percent with the tax cuts and

Jobs Act of 2017 the only downside here

is that since the corporation is a

different entity than the owner

technically you don't own that money the

corporation owns the money and you own

the corporation and if you want to move

the money from the company's bank

account into your own bank account by

paying yourself dividends you will have

to pay an additional fifteen to twenty

percent dividend distribution tax in

some cases this double taxation still

ends up being less than if you were to

pay earned income tax many people even

celebrities are beginning to use

corporations to run their businesses

celebrities like jay-z have corporations

that hold the rights to the performer

which is himself this way the money

doesn't go straight to his bank account

triggering the higher tax but rather to

his corporation JC incorporated this not

only allows the owner to take advantage

of corporate tax rates but also to claim

any expenses related to the business as

a corporate loss many successful

corporate owners by their luxuries like

a nice car or at least a beautiful house

as long as is related to business which

allows them to claim those purchases as

a business expense which lowers the

taxable income of the company lowering

their tax bill in a sense they are

allowed to spend money that is related

to their business first before the IRS

comes to claim their share now this is

an easy way for anyone with a good

business to reduce their taxes but not

eliminate them there are a few other

loopholes the wealthy use that allows

them to not pay any taxes if they don't

want to a very common practice of

multi-billion dollar companies is the

use of water called tax havens these

little handy loopholes are companies

that are placed in offshore countries to

offer these corporations an individual

little to no tax liability and legally

they can share no financial information

about the company to foreign tax

authorities like the US some tax havens

are places like the Bahamas Bermuda

Jersey and the Cayman Islands just to

name a few now companies can't just send

their money to a bank account to the

Bahamas to avoid taxes there has to be a

legal structure that takes advantage of

the current tax laws to pretend like

they made less money than they actually

did for example let's say that you built

a company and you made one hundred

million dollars in profits this year

this means that in the u.s. you will

have to pay 21 million dollars in

corporate taxes based on the 21 percent

tax rate but what if you can tell the

government that you only made 20 million

dollars instead of a hundred this means

that you would only have to pay 4.2

million dollars in corporate taxes

instead of the normal 21 million but how

do you do that the way many companies

can legally do this is by creating a

company offshore like in the Bahamas and

transferred the ownership of their

patents trademarks and intellectual

property from the real company in the

u.s. to their other company in the

Bahamas and when Uncle Sam comes to

collect 21 million they can just say

sorry we have to pay 80 million dollars

to this other company in the Bahamas to

license their patents and now they have

successfully sheltered 80 million

dollars offshore and paid zero dollars

in taxes for them because the Bahamas

happens to have a zero percent corporate

tax rate and instead of paying 21

million dollars they only paid 4.2

million dollars saving around sixteen

point eight million dollars in taxes

this means that instead of paying twenty

one percent taxes they only paid four

point two percent of their total profits

this strategy might save lots of money

in taxes but it also has its flaws

while this money is hidden offshore it

cannot be used if the company tries to

bring the money back to the US it would

be taxed this is what originally created

Apple's cash problem they had lots of

money in the bank but it was out of

reach because bringing the money back

would mean paying the taxes they were

avoiding in the first place so what

would be the purpose of hiding money

offshore if

can use it well companies sheltered

their money offshore to be brought back

when an opportunity to save in taxes

comes to light and this happened in

January of 2018 where the corporate tax

rate changed from 35 percent to 21

percent given the perfect opportunity

for companies to bring back their money

and pay less and taxes if you paid

attention in the news over the last year

Apple has been aggressively bringing

back their money and buying back their

shares which in turn makes them more

money by increasing the price of the

shares which can allow them to save in

taxes in a different way see many

company executives prefer to get paid a

portion of their compensation in stock

options here as the company evaluation

goes up companies can create new shares

to pay their executives this creates a

couple of benefits one the executive

won't pay any taxes on that compensation

until they sell their stock which puts

them in control of when they are taxed

and second the company can report losses

and form of salaries without actually

losing cash since they can just create

new shares they can legally report the

loss but not lose the cash in essence

they are printing their own money in

form of shares to pay their executives

now getting paid in shares can also

create another loophole for company

executives to avoid taxes since they get

paid in shares the executives can use

those shares to purchase stock options

which can be used to borrow money from

an investment bank while using their

shares as collateral this allows them to

bypass the capital gains tax given them

free money that they can neither repay

later from their profits of using the

money or handing over the shares

themselves given them tax-free money a

good example of this is Elon Musk in

2017 he used about 40% of his own

personal shares in Tesla as collateral

for loans which at the time was amounted

to over four billion dollars in Tesla

shares used as collateral in 2019 he

reportedly owes over 500 million dollars

backed by his ownership in Tesla it is

unclear why he used the money for but

many say that he used this money to

invest in his other companies a very

interesting trick that many wealthy

corporations

use our the use of shell companies which

are companies that do not have a

physical location don't have any

products or any employees but are used

to hold bank accounts where money can

pass through to avoid being taxed a good

example of this is the company Apple

Apple reportedly had around two hundred

and eighty five billion dollars hidden

offshore as an American company that

does business internationally Apple

would have to pay US taxes from money

that was made in other countries since

the u.s. is the only country that taxes

based on citizenship the company would

have to pay the taxes from the country

it operates in and the rest would be

paid to the US in order to complete that

21% but when there's a will and billions

of dollars at stake there's a way Apple

decided to create a company in Ireland

where corporate taxes are 12.5% then

they create another company in the

Netherlands and lastly they have another

company in Ireland that has a legal

residency in Jersey an island off the

coast of France that you guessed it has

no corporate taxes so the company in

Jersey who owns all the patents and all

the intellectual property license the

properties to the company in the

Netherlands which is more of a bank

account than a company this company in

the Netherlands subleases the property

to the company in Ireland which is the

company that takes care of their

international operations this means that

when someone buys an iPhone in Europe

the money goes to the Irish company that

takes care of the operations this money

briefly flashes in a Dutch bank account

before retiring back in Ireland since

the company is legally registered in

Jersey it cannot be taxed and that is

how a shell company without a physical

location or even any employees was used

to transfer money tax-free now believe

it or not many countries will tax

someone when they pass away this is what

is called the state tax the death tax or

the inheritance tax many wealthy people

also call it their voluntary tax because

there are a few ways to easily avoid it

one of the most popular ones is by using

what is called a grat or a grant to

retain annuity trust this is basically a

trust fund which creates an irrevocable

trust for a period of time which pays

annuities and once they trust expire

the beneficiary receives all the assets

tax-free

now something that many wealthy people

do is reinvest their money back into

investments to avoid the capital gains

tax for example let's say that you sold

a few real estate properties worth

$500,000

you could either pay that 20% capital

gains tax or use this cash to reinvest

in more property which allows you to

grow your net worth

tax-free this is what many wealthy

individuals do to create massive wealth

and avoid large tax liabilities they

think that we use these five hundred

thousand dollars to buy five more

properties worth half a million dollars

each let's say that in 30 years these

properties are paid off and have an

appreciating value of 4 million dollars

in the mean time you will only pay taxes

on the passive income that your property

generates which is usually between 15

and 20 percent all while taking

advantage of the tax laws the benefit

real estate such as depreciation and

mortgage interest at the end you could

use a grat that we explained earlier to

transfer your wealth to your kids

tax-free as we can see knowledge and a

little creativity are like superpowers

to these highly successful individuals

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