How do uber-rich in US protect their wealth?
Taxes of the rich and famous have grabbed headlines in recent years, thanks in part to Internal Revenue Service leaks and the yearslong fight to release six years of former President Donald Trump’s tax returns.
Setting aside questions about whether these returns should have been revealed or who contributes the most to U.S. tax revenue (in 2020, the top 1% of taxpayers accounted for more income taxes paid than the bottom 90% combined, according to think tank Tax Foundation), these returns can offer a window into how uber-rich Americans protect, transfer and grow their assets.
Even though some tactics are probably out of reach for most people, others are simple enough that they can be used with enough planning.
Use Roth IRA to avoid taxes
Billionaire Peter Thiel famously contributed $2,000 in 1999 to a Roth IRA and used $1,700 of it to buy 1.7 million founders’ shares of Paypal stock. Within two decades, which included ebay’s buyout of Paypal and a private investment in Facebook – all safely within the confines of the Roth IRA – that investment ballooned to $5 billion, which can all be withdrawn tax-free when he turns 591⁄2.
Roth IRA contributions use after-tax dollars that allow tax-free withdrawals after age 591⁄2 and at least five years invested. By contrast, traditional IRAS are funded with pretax dollars for an upfront benefit and withdrawals that are taxed.
It’s unlikely that regular folks can find a lucrative private investment like Thiel, but they can still take advantage of Roth IRAS even if they earn more than the prescribed limits.
To avoid those limitations, use a socalled backdoor Roth IRA.
Use a loss to lower your taxes
Billionaires like Amazon.com founder Jeff Bezos and Trump love losses because they help cut tax liabilities. You can use them too, on a smaller scale. With last year’s market rout, this tax season may be a good time to familiarize yourself with this tactic.
If you sold investments at a loss, you could use up to $3,000 a year to offset ordinary income on federal income taxes and carry over the rest to future years. Married individuals filing separately can deduct half of that each year.
Any unused losses can be carried forward indefinitely.
Short- and long-term losses must be used first to offset gains of the same type, so focus on short-term losses first when looking for tax losses. They provide the greatest benefit because they’re first used to offset short-term gains – and short-term gains are taxed at a higher marginal rate, according to Fidelity.
Warning: The wash sale rule says you can’t take the tax benefit if you sell a losing investment and buy the same or substantially identical security within 30 days before or after the sale. So, make sure you no longer want that investment or can easily replace it with other investments that fill a similar role in your portfolio.
Cryptocurrency and other digital assets are exempt from the wash sale rule.
Roth IRA contributions use after-tax dollars that allow tax-free withdrawals after age 591⁄2 and at least five years invested.
Hire your children
If you own a business, hire your kids. You can hire them and pay them big salaries. The salaries will be deductible as business expenses, and you’re passing on money to your kin, said Ed Smith, senior tax and estate planner at Janney Montgomery Scott.