Even If You Aren’t Rich, It’s Always Useful to Learn How the Rich Manage Their Money. Find Out How They Avoid Paying Taxes.
Hello Aluxers and welcome back to what might be, one of the most important Sunday Motivational Articles you’ve ever read, because by the end of this piece, you’ll understand how to keep more of your money than ever before by avoiding to pay taxes.
If you search for this kind of information on the web you’ll read about maxing out your contributions and so on, but that’s not really what you’re looking for is it?
Albert Einstein said it best:
The hardest thing in the world to understand is the income tax!
The rich have very expensive accounting experts that help them minimize just how much money they pay in taxes.
In the last decade, we’ve learned quite a lot about the field and this expertise has allowed our companies and personal wealth to grow at an accelerated rate. Write all of these down because you don’t know when this information will come in hand.
This isn’t financial advice, this is just what we’ve seen the rich use to grow their wealth and we believe it’s valuable for you to know about it.
As always, here is the video version of this article:
Here are 15 Ways Rich People Pay little to no taxes.
Invest All of It
The rich don’t sit on cash unless they need it for something specific.
Here’s the golden rule when it comes to paying taxes:
Reinvested profit is not taxed!
If your company was about to make 5 million dollars in profit and before the end of the fiscal year you choose to invest those 5 million back into the business in order to grow it even more, you don’t have to pay taxes on the 5 million.
That’s how companies grow quickly.
As the owner of the business, your net worth goes through the roof, with little to no tax to be paid.
If you want to invest your money but are scared to fall into some fraud scheme, check out 15 Red Flags in Investments.
Everything You Use Is Owned by a Business
The second golden rule of tax optimisation is:
Here’s the thing, if a business needs anything to function, the money you spend isn’t taxable.
You want to buy yourself a new car? Well, the company needs the car as well, so allow the company to buy it on the company’s dime and you get to use it since you need it to run the business.
Here are some things rich people deduct:
- Any type of technology (hardware, software etc.) Laptops, phones, gadgets, they’re all needed for the business.
- Travel – hotels and flights are needed for business trips
- Home office & utilities like the internet,
- health insurance premiums
- Even going out to eat is a deductible expense
The more things you can deduct, the less money there is to be taxed.
Move Somewhere with Little or No Tax
People often underestimate just how big of an impact moving somewhere where they allowed you to keep your money would have on your life.
This used to be the way to do it back in the day. You would move to Dubai, Monaco, the Cayman Islands or the Bahamas as your main residence.
These countries have no income tax. They don’t require you to pay any tax on the money you’re making.
But there is a catch: it’s usually really expensive to move there, hence why the rich get an unfair advantage in life.
The cost of living in Monaco is also incredibly high, but even with everything
Send It Overseas
This is how Facebook, Google and Apple do it.
They set up companies in Ireland because of its tax friendly environment. These companies own the intellectual property. The US company needs to pay a licensing fee to the Ireland company every year to keep developing and selling products in the US.
This created a legit deductible expense for the US company.
Through this scheme, they’re taking money out of the US economy and moving it to Ireland where they end up paying only 1% or even less with even more optimisation.
If you live in a low income tax country, you can always set up a local company there and invoice your US subsidiary for rendered services minimising the tax bourdain in the US.
Companies like these tech giants would rather pay a fine than pay their taxes in full.
The more you think about it, the more you realise:
A fine is a tax for doing something wrong.
A tax is a fine for doing something right.
5th rule of taxes:
Money donated to charity is not taxable!
This is why every rich individual owns a foundation of sorts.
In their defence, the state has always proven to be a poor manager of money, so instead of giving it the money to do with it as it pleases, you’re better off using a charitable foundation to make sure your money actually has a positive impact on your community.
Where things get interesting, is that even these non-taxable foundation have deductible expenses. They need things to function.
You can even donate land, vehicles or other assets to a charity you own and it still counts as a charitable contribution. (also, as the head of the charity group, you can still use the same car that you donated on paper)
Instead of a Salary They Take Equity
As queen Bey put it:
Pay me in equity!
You do this for 2 reasons:
- Equity might increase in value over time
- Equity isn’t taxable, unless you sell it.
This is how Elon Musk got so rich so quickly. Believe it or not, Elon’s yearly salary is between $0 and $23,000. Yep, that’s how many dollars Elon earns per year for his role as CEO of tesla.
Based on the company performance, Elon gets new minted stock instead.
With Tesla being a public company, his net worth is skyrocketing and at this rate, it’s just a matter of time until he most likely will become the richest man in the world.
Here’s something only the rich know:
The art trade is the last major unregulated market!
When you buy a piece of art, it counts as an expense and if you’ve been following along, by now you should know that a good portion of expenses can be deductible.
But as the rich know, there are layers to this.
Let’s say you earn 1 million dollars this year and decide to blow it all on a 1 million dollar painting.
Since the expense matches the income, there’s 0 money left to be taxed.
3 years go by and now the same painting you own is worth 6 million dollars, or at least that’s what a professional appraiser says.
Instead of selling it for profit you decide to donate it to a museum or better yet, to your art-foundation.
This means you just scored a 6 million dollar tax deductible.
Assuming you’re still earning 1 million per year, you just saved an additional 5 million dollars in nontaxable income; and it’s all legal.
You can even go for another round if you want to.
Let’s say you decide to sell the painting at the 6 million valuation, earning you 5 million in profit on that deal which normally should be taxed, right?!. The government, once again, comes to the aid of the super wealthy.
If you take all the money you made from the sale, all 6 million, and buy more art with them, you don’t have to pay any taxes on the profit you’ve made from the sale.
That’s why rich people buy art and this is the kind of information people subscribe to our channel for. You’re not getting this anywhere else.
Multiple Nationalities with No Fixed Residence
This is probably the shadiest and most confusing one on the list, but people have done this successfully everywhere around the world.
When it comes to paying taxes, you must pay taxes in your country of residence – your home country.
But what happens when you no longer have a home country?!
There are plenty of super wealthy individuals that choose not to have a home country, despite owning properties all over the world.
When institutions ask for a proof of address, they provide one from a property they own in Thailand or Bhutan that’s in a different language and overlooked by a government that has no intention of providing any additional information.
Then there are the folks that buy a massive yacht and use it as their primary home. One day you’re parked on the coast of Monaco, the next you’re in international waters.
Although we recommend having more than 1 nationality so you can reap the benefits of multiple passports, we don’t think that going full off the grid is a long-term solution.
Gift Money Away
Did you know you can gift things to people and the gift is non-taxable? Crazy right?!
There is a $15,000 cap on the gift tho’
If the gift is worth less than the 15k, you don’t have to tell the IRS about it as it counts as a non-taxable event.
You might think: cool, but this is an article about really rich people and how they optimise to make the most out of it… 15k barely gets you into the Rolex game, gift-wise..
15,000 dollars might now sound like a lot, but there’s more room to maneuver in. As of 2021, the lifetime gift exemption is capped at 11.7 million dollars in the US, as long as each gift is less than 15k.
11.7 million dollars in tax free wealth translates to a damn lot of Rolex watches.
Hold It in Privacy Coins
Crypto is changing the game in terms of wealth transfers and wealth security.
The fact that you can put a billion dollars on a stick, put it in your pocket and fly to Singapore with it is mind-blowing.
With the likes of Bitcoin & Ethereum, which are heavily regulated, measures are in place to provide transparency, link wallets to individuals and make sure everyone is paying their fair share.
By the way, profits from sale of crypto are only taxed at 10% in most countries, still giving a better return than some other assets if you take into account the industry price appreciation.
If all this sounds super exciting to you, go to alux.com/bitcoin and look over our Bitcoin Essentials course. It’s meant to help you get started with crypto as quickly as possible and if you use the promo code ALUXER you can get 25% OFF at checkout.
Bitcoin is completely legal and it’s here to stay.
But there’s more to it. The rise of blockchains have given way to a new breed of technological currencies called PRIVACY COINS.
These can be exchanged, stored and transferred completely anonymously. Privacy coins are not illegal, but their legality remains subject to each jurisdiction.
The most popular ones are Monero, Dash & ZCash.
The belief is that once you make your money legally, you should be allowed to spend transact with it without other parties overlooking your transactions.
You Have No Money but You Have Assets You Can Borrow Against
Here’s why most rich people are super wealthy but cash poor:
In order to take cash out of your businesses you need to pay taxes on that money, so rich people choose to never take their money out. Just leave it as stocks or assets.
But there are situations where you need some kind of cash. That’s where the relation you have with your bank comes into play.
Rich people walk into banks and say: Look at how much stuff I own, the cars, the assets, the stocks. I’m good for the money if it comes to it, so gimme a loan.
Bank looks at the portfolio and they give wealthy individuals access to quick cash anytime they want.
Since this is technically a loan they take, this isn’t their money, so you’re not required to pay tax, just to give it back. If all of it happens through a company and not from an individual perspective, this mutually beneficial relationship can go on for lifetimes.
Filing for Bankruptcy
Filing for bankruptcy is expensive, tiresome and complicated, unless you’re super rich and know how to get over it.
Here’s how the process works.
Let’s say you’re a pretty decent lawyer, making $250,000 per year. You own a 1 million dollar house and managed to save an additional 1 million dollars.
You’re looking to go into business, so you decide to buy a 10 million dollar office building because it will make you a lot of money.
You go to a bank, put your 1 million down, get a 9 million loan and buy the office building.
1 year later, a pandemic hits and all your tenants leave. You still owe the bank 9 million dollars. To make matters worse, the building you bought now is worth only 5 million dollars because nobody wants to buy an office building.
Since the office building is owned through a company, our lawyer can now file for bankruptcy. Although they will take the office building away from him and will have a really hard time every working with the bank again, bankruptcy laws prevent the bank from taking away the house or syphoning off his wages.
This is the difference between being poor and being broke. Rich people can be broke, meaning that on paper their networth might be 0 or even negative, but they’ll never be poor.
Also, if you didn’t need the bank, paid it all out in cash, the financial loss would still count as a tax deductible, meaning that for the many years to come, you won’t need to pay taxes on your income until you catch up to the amount of money you lost.
Claim Your Yacht as Your Second Home
Here’s an interesting observation when it comes to taxes:
Governments love home-owners and despise the super wealthy who like to splurge, they really want to tax these show-off – #taxtherich it’s actually trending all around the internet right now.
So what do rich people do to combat this? They claim their yachts as secondary homes to get better taxation rates.
At the end of the day it’s true, they’re using it as a holiday home when they’re travelling to Mykonos during the Summer.
As long as the boat has sleeping, cooking and toilet facilities, then the IRS treats the boat as a second home.
Motor-homes can also be used in the same way.. But how many super-rich people are buying motor-homes anyway?!
Using a Trust to Avoid Paying Estate Tax
Among the rich there’s a funny saying that goes like this:
A person doesn’t know how much he has to be thankful for until he has to pay taxes on it.
Unless you’re rich you might now be aware of this: If you’re rich and you die, the state taxes up to 45% of the wealth you want to pass down to your children. It’s called an estate tax.
By the way.. Here’s an important information:
The US qualifies you as rich if you’re worth more than 11.7 million dollars!
For everyone worth less than that there isn’t an estate tax or it is considerably lower.
11.7 million might sound like a lot of money to the average person, but we’re living in the realms of billionaires and we’re likely going to have our first trillionaire in this lifetime.
With inflation the way it’s going right now, everyone will be a millionaire eventually.
The way rich people are structuring their wealth in order to keep the state from taking it away is by using TRUSTS.
If you put things into a trust then, provided certain conditions are met, they no longer belong to you, so it’s not yours to pass them down onto your children.
Once the property is held in trust, it’s outside anyone’s estate for inheritance tax purposes.
It also protects you from putting all your wealth under the name of your child because they could easily blow through it if they decided to, so the control remains with you while you’re alive.
You can also set up smart-contract-like rules where your children get gradual access to the assets in the trust under certain conditions like, when they turn 25 or graduate school.
Depreciating Assets on Paper to Outweigh the Cash Income
Accounting is the language of money so if you want to be rich you better learn how to speak it, or at least understand it.
In simple terms: Depreciation is a deduction that enables a business to write off the cost of the investment it buys, be it a car, a machine and so on.
It’s spread out for the life of the investment. The reason behind spreading deductions for the cost of property is to enable a business to be in a position to replace the property at the end of its life.
Now… let’s say you buy a factory for 10 million dollars and intend to use it to make those ugly looking face-shields for the next 10 years.
From an accounting perspective, every year, the value of the factory will be depreciating by 1 million dollars.
If you make less than 1 million dollars per year from selling your face shields, there is no profit left to tax.
Equipment, vehicles and even offices can be depreciated from an accounting perspective allowing you to keep paying less and less tax.
If people knew how to optimise their money, their businesses would grow at much faster rates, allowing them to hire more people and create better products.
You are under no obligation to pay more taxes than it is legally required!
Taxation was meant to help the poor, but since everything is privatized and optimised for profit it doesn’t work the way it was intended.
We have a large audience from everywhere around the world so we’re curious to know: What % do you pay in taxes in your country?
Let us know in the comments, it will for sure make for an interesting conversation!