The reason for this isn’t what you think…
It’s a well-known fact that some billionaires pay surprisingly small tax amounts relative to their net worth. In some years, Amazon pays $0 in federal income taxes despite reporting billions of dollars in profit. How can that be?
Even when Amazon had to pay taxes in 2019, they paid $162 million which only represented roughly 1.2% of their monthly income.
We can all think of a few super-wealthy people who seem to pay relatively little taxes compared to their net worth. This has led to the misconception that the taxing system favors the ultra-rich.
However, the taxing system doesn’t favor anyone. The taxing system contains several rules for what gets taxed, at what percentages, and what doesn’t get taxed.
Billionaires aren’t favored by the tax code. They just know how to play the game and play accordingly. You can make the argument that billionaires should pay more of their fair share, but that decision isn’t up to me or you. It’s more productive to look at the tax system itself and learn how to play the game. I’d rather focus on what I can control instead of what I can’t control.
Very little nuances can save you thousands of dollars over the long run.
Mark Zuckerberg is so wealthy that he only takes an annual $1 salary, and several CEOs take on similar salaries. While this can be seen as a good samaritan, it’s also beneficial for them to earn their money by receiving stocks and stock options by hitting certain milestones rather than receiving a salary.
A salary is classified as earned income, and this gets taxed at the highest level of any income. Portfolio income, on the other hand, isn’t taxed as much…especially if you’re selling shares you’ve held for at least 1 year and 1 day, qualifying them for long-term capital gains.
If you’re married and filing taxes jointly, you can report up to $80,000 in income without getting taxed on the long-term capital gains.
In other words, if you and your partner make a combined $50,000 each year, and you make $30,000 in long-term capital gains, that $30,000 won’t get taxed.
And if you don’t sell the shares, you don’t get taxed.
Real estate offers even more tax advantages than stocks, including imaginary write-offs such as the depreciation expense.
The tax system benefits businesses of all sizes as many of the investments you’re supposed to make for your business anyway are tax-deductible.
Each category has its nuances and different ways to deduct taxes. A pro tip for the travelers is to schedule a few business meetings wherever you go. If you want to go to Disney World in Orlando, you can turn your traveling expenses into write offs as long as you schedule a few business meetings in Orlando.
I know many business colleagues who will announce they’re traveling somewhere and then ask who in their network lives nearby. Most of these people are business owners themselves, and scheduling a few meetings turns a personal vacation into a write off…even though you still went to Disney World and have a lot of fun in Orlando.
Disney World itself? You might turn that into a write off if all of your business meetings are conducted within the premises, but I don’t know enough about taxes. It’s best to talk to a good accountant.
I recently began my journey to learning more about the tax system and different ways to capitalize on certain rules. A good accountant is one of the best investments a billionaire can make.
The rules exist for everyone. Billionaires just happen to know those rules, or they hire people who happen to know them. If you know the rules too, you can pay significantly less tax by making some small tweaks to your process.