Taxes of the rich and famous have grabbed headlines in recent years, thanks in part to IRS 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 likely out of reach for most people, others are simple enough that they can be used with enough planning.
How do rich people avoid taxes?Wealthy Americans avoid $160B a year in tax payments
Important information:Are you ready to file your taxes? Here’s everything you need to know to file taxes in 2023.
How to use a Roth IRA to avoid taxes and grow wealth
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Facebook – all safely within the confines of the Roth IRA — that investment ballooned to $5 billion, which can all be withdrawn tax-free when he turns 59-½.
Roth IRA contributions use after-tax dollars that alllow tax-free withdrawals after age 59-½ and at least five years invested. By contrast, traditional IRAs are funded with pre-tax 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.
In 2022, you could only contribute to a Roth IRA if you earned less than $153,000 as a single filer or $228,000 if married and filing jointly, with a maximum of $6,500 if you earned less than $144,000 or $214,000, respectively.
To avoid those limitations, use a so-called backdoor Roth IRA. Here’s how:
- Contribute to a traditional IRA using pre-tax money
- Transfer that money to a Roth IRA
- Pay taxes. If you took the tax benefit when you contributed to the traditional IRA, you must give it back at tax time by reporting it as income as well as any gains the money earned.
How to 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.
Tip: 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.
NOTE: Cryptocurrency and other digital assets are exempt from the wash sale rule.
“Crypto’s not considered ‘securities’, so it’s not subject to wash sales,” said Phil Drudy, managing director at consulting company CBIZ MHM’s New York tax department. That means you could’ve sold crypto at a loss last year to take advantage of the tax benefit, then bought it back immediately at the lower price if you still wanted it in your portfolio, he said.
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Hire your kids
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.
More of your 2022 tax season questions answered
- Tax season 2023 officially started: Here are key deadlines to keep in mind
- 1099, W-4, W-2, W-9, 1040: What are these forms used for when filing your taxes?
- What are the 2022 US federal tax brackets? What are the new 2023 tax brackets? Answers here
- 2023 tax season guide for new parents: What to know about the Child Tax Credit, EITC and more
- IRS may owe you from 2020 taxes. Here’s why and what you need to do to find out if you’re owed
- What is OASDI tax on my paycheck? Here’s why you and your employer pay this federal tax
- Do you have to report crypto on taxes? Yes. Here’s what you should know about form 8949
- What is a 1098-E form? What you need to know about the student loan interest statement
- Tax season 2023: What exactly is the mileage rate? There’s more than one.
- Is it better to pay someone to do your taxes or do them yourself? We’ll help you decide.
- What is income tax? What to know about how it works, different types and more
- Is Social Security income taxable by the IRS? Here’s what you might owe on your benefits
- Companies can deduct full cost of business meals on 2022 tax returns
- Who has to file a tax return: It’s not necessary for everyone. Here are the rules.
- What is capital gains tax in simple terms? A guide to 2023 rates, long-term vs. short-term
- Best way to receive your 2023 tax refund? IRS says direct deposit. Here’s how to do it.
- What is FICA? How much you contribute to federal payroll taxes.
- How much is the Child Tax Credit for 2023? Here’s what you need to know about qualifying.
- A 30% national sales tax? Abolishing the IRS? What the FairTax Act of 2023 would do.
- The Inflation Reduction Act carves out an EV tax credit for 2023. Does Tesla qualify?
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
