To Smart Investors,
Each tax season, millions of Americans give away nearly 30% of their earnings to the government, while some of the wealthiest individuals consistently pay little or nothing at all.
Billionaires such as Warren Buffett, Jeff Bezos, and Elon Musk paying effective federal tax rates near 0%.
Could everyday taxpayers legally replicate some of these strategies to lower their own tax burdens significantly?
In many cases, yes.
This article outlines very basic yet practical tax strategies utilized by billionaires, along with actionable steps ordinary investors can implement to minimize their own taxes.
Strategic Debt Utilization
Billionaires minimize taxes by rarely selling appreciating assets, thus avoiding capital gains taxes. Instead, they leverage these assets as collateral for loans at exceptionally low interest rates. For example, Elon Musk borrowed billions against Tesla shares, bypassing substantial capital gains taxes.
Practical Applications:
Home Equity Lines of Credit (HELOC): Homeowners can access home equity tax-free, with interest potentially deductible if used for home improvements.
Margin Loans: Brokerages like Fidelity or Interactive Brokers offer loans against investment portfolios, enabling cash access without triggering taxable events.
Maximizing Tax-Advantaged Accounts
High-net-worth individuals strategically use retirement and health savings accounts to protect their investments from immediate taxation.
Realistic Strategies:
Roth IRA Conversions: Convert traditional IRA assets into Roth IRAs during low-income years to lock in lower tax rates and secure future tax-free withdrawals.
Mega Backdoor Roth IRAs: High-income earners can maximize Roth IRA contributions through after-tax rollovers.
Health Savings Accounts (HSAs): Offer triple-tax advantages—deductions for contributions, tax-free investment growth, and tax-free medical expense withdrawals.
Effective Business Entity Structures
Wealthy individuals use entities like LLCs, S-Corporations, and trusts to minimize personal tax liabilities.
Accessible Strategies:
S-Corporation Salary Structure: Owners pay themselves reasonable salaries, distributing remaining profits as dividends to lower payroll taxes.
Solo 401(k): Self-employed individuals can contribute up to $66,000 (as of 2024), substantially reducing taxable income.
Real Estate Investment Tactics
Real estate investments provide notable tax advantages via depreciation, deductions, and "1031 exchanges," allowing indefinite deferral of capital gains taxes.
Applications:
1031 Exchange: Selling and reinvesting in similar properties defers capital gains indefinitely.
Short-Term Rental Depreciation: Active management of short-term rentals (e.g., Airbnb) qualifies investors for accelerated depreciation, offsetting taxable income.
Tax-Loss Harvesting
Billionaires frequently offset taxable income by strategically realizing investment losses.
Practical Methods:
Regular Portfolio Reviews: Selling underperforming assets offsets realized gains.
Opportunity Zone Investments: Investing in Opportunity Zones defers—and potentially eliminates—capital gains taxes over time.
Charitable Giving and Gifting
Charitable contributions yield significant tax deductions. Billionaires often utilize donor-advised funds and charitable trusts.
Practical Advice:
Donor-Advised Funds (DAFs): Immediate tax deductions and tax-free growth through platforms like Fidelity Charitable.
Qualified Charitable Distributions (QCDs): Individuals aged 70½+ can donate directly from IRAs (up to $100,000 annually) to lower taxable income.
Timing and Deferral of Income
Wealthy taxpayers strategically time income recognition to minimize their tax liabilities.
Techniques:
Deferred Compensation Agreements: Delaying income can lower immediate tax burdens, moving income into lower future tax brackets.
Income Stacking: Strategically concentrating income or deductions in particular years optimizes overall taxes.
Case Study: How John, a Retail Investor, Drastically Reduced His Taxes
John, a typical retail Investor with $500,000, implemented the following strategies:
Stock Portfolio ($150,000): Through regular tax-loss harvesting ($10,000 annually), John saves approximately $1,500 annually (assuming a 15% capital gains tax rate).
Real Estate ($150,000): Short-term rental depreciation deductions of about $5,000 annually save him around $1,200 each year (at a 24% marginal tax rate). Using 1031 exchanges, he defers about $4,500 in capital gains taxes every five years.
HSAs and Roth IRAs: Annual maximum contributions ($8,300 for the HSA, $13,000 combined for Roth IRAs) yield approximately $1,992 in immediate tax savings annually, plus future tax-free growth.
Opportunity Zone Fund ($100,000): Defers roughly $20,000 in capital gains taxes over ten years, averaging $2,000 in annualized savings.
Donor-Advised Fund ($25,000): Immediately reduces taxes by $6,000 at a 24% marginal tax rate.
Total Annual Savings:
Annual strategies combined save John about $6,692 annually.
Periodic savings include $4,500 every five years (1031 exchange).
Immediate savings from the Donor-Advised Fund: $6,000.
Before implementing these strategies, John’s effective tax rate on investment returns was approximately 20%. After employing these tax strategies, his effective rate fell to about 0.88%, representing a 95.6% reduction.
Can Anyone Do It?
While not everyone possesses billionaire-level resources, adopting these strategies can significantly reduce tax burdens.
Proactive planning, structured investing, and leveraging available tax-advantaged vehicles can dramatically lower effective tax rates, making tax season more manageable and financially rewarding for all Investors.
With every good wish, I remain
Yours sincerely in Christ,
Rev. Jack Roshi
Applied Mathematics Department, MIT
Lead Quant and Board Member, Sabre Capital GroupOpinions are my own