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

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 that is why we decided to partner with Skillshare as the sponsor of this video skill share is a learning platform with classes ranging from graphic design photography video to freelancing marketing and brand building as many of you guys know I've always had a passion for video and I use classes like the ones you find in Skillshare to learn how to shoot and edit videos and that is the reason for us being here today see skill shares for those of us who are lifelong learners that are always looking to improve our skills and what a great way to start the year then with 2 months of skill share premium for free that's right when you click on the link in the description of this video you will get two whole months of skill sure premium absolutely free and let me know what you thought of the classes and as always thank you for watching and I will see you in the next video

Channel: The Better Men Project

Views: 388,852

Keywords: How the rich avoid taxes, tax loopholes the rich use, how the rich pay less taxes, tax strategies of the wealthy, tax breaks for the rich explained, how the rich pay no taxes explained, how to legally pay no taxes, how to legally avoid taxes, should the rich pay more in taxes?, how do big companies pay 0 taxes, tax loopholes for the rich, Tax avoidance, Tax avoidance vs tax evasion, tax havens, how the rich hide their money and pay no tax

Id: DoGqMWnHiFM

Length: 13min 13sec (793 seconds)

Published: Wed Jan 22 2020