How do billionaires pay shockingly little in taxes compared to working Americans? The answer isn’t luck or oversight; it’s the product of intricate strategies, high-powered legal teams, and a tax code riddled with loopholes. According to a 2021 ProPublica investigation, some wealthiest Americans paid zero federal income tax in certain years.
For example, Elon Musk and Jeff Bezos each avoided any federal income tax liability in 2018 and 2007, respectively, despite their immense fortunes. IRS data released in 2022 revealed that the 25 richest Americans paid a true tax rate of just 3.4% between 2014 and 2018, while the average American worker pays around 14%.
Read on for 15 legal tax avoidance tactics the ultra-rich use to shield billions from the taxman, complete with real-world statistics and credible sources.
The “Buy, Borrow, Die” Strategy
America’s wealthiest often avoid realizing capital gains by following the “buy, borrow, die” strategy. They buy appreciating assets like stocks and real estate, borrow against these assets to access liquidity without selling, and then pass them on to heirs. Upon inheritance, the assets receive a “stepped-up basis,” which erases the embedded capital gains tax.
According to the Congressional Budget Office, this strategy resulted in over $643 billion in unrealized capital gains in 2022. The step-up basis rule alone costs the U.S. government an estimated $41.9 billion annually in forgone taxes.
Using Roth IRAs for Tax-Free Wealth Growth
Some billionaires, like Peter Thiel, have leveraged Roth IRAs to achieve massive tax-free gains. By placing startup shares into their Roth IRAs, they’ve watched their investments grow exponentially without incurring taxes.
ProPublica revealed that Thiel’s Roth IRA soared to $5 billion by 2019, starting with just $2,000 in PayPal shares. While Roth IRAs were initially intended for ordinary savers, the lack of value caps has allowed the ultra-wealthy to benefit disproportionately.
Converting High-Tax Income Into Low-Tax Gains
The ultra-rich often use advanced tax strategies to convert ordinary income, taxed at rates as high as 37% (as of 2023), into long-term capital gains taxed at a lower maximum rate of 20%. Hedge funds, for instance, use carried interest to reclassify management fees as capital gains.
A 2022 report from the Government Accountability Office found that such tactics are widely used to take advantage of lower tax rates.
Owning Sports Teams for Tax Deductions
Billionaire sports team owners take advantage of tax rules by amortizing their franchises’ purchase price and intangible assets over 15 years, writing off billions against taxable income. This includes treating appreciating assets like player contracts and TV deals as depreciating, allowing them to claim paper losses while their teams increase in value.
In one instance, Steve Ballmer of the LA Clippers has reported massive tax losses despite his team’s profitability, significantly lowering his tax bill. If owners hold teams until death, their heirs can reset asset values through a “stepped-up basis,” often avoiding capital gains taxes entirely. This system creates what critics call a perpetual tax shelter for the ultra-wealthy.
Leveraging Real Estate Depreciation
Billionaires like Donald Trump use real estate depreciation as a key tax strategy. By claiming depreciation as a non-cash expense, they reduce their taxable income significantly, even as their properties appreciate.
In 2020, such deductions cut taxable rental income by $109 billion, allowing property owners to save massively. Combined with deductions for mortgage interest, property taxes, and maintenance, this approach minimizes their tax burden while maximizing wealth.
Using Trusts to Minimize Estate Taxes
Trusts are a key tool for the wealthy to reduce estate and inheritance taxes. Various types of trusts, such as GRATs, QTIPs, and SLATs, are designed to transfer wealth outside the taxable estate.
A 2021 ProPublica report also revealed that over half of the nation’s 100 wealthiest individuals have used GRATs and other trusts to avoid estate taxes.
Deferring Taxes Through Corporate Structures
The ultra-wealthy frequently structure their holdings through S corporations, partnerships, and LLCs to defer personal income taxes. Income retained within these corporate structures is often taxed at a lower rate than individual income.
The IRS reported that partnerships filed just over 4 million returns for Tax Year 2020, marking a 12.0% increase from 2019, mainly driven by these tax deferral strategies.
Borrowing Against Assets to Avoid Taxes
Billionaires often borrow against their appreciated assets instead of selling them, allowing them to access cash without triggering capital gains taxes. A Federal Reserve report reveals a 26% rise in securities-based lending among wealthy Americans from 2019 to 2022.
This type of lending allows borrowers to use assets like stocks, bonds, or mutual funds as collateral for credit. Since loans are not taxable income, this strategy provides liquidity while avoiding taxable events.
Claiming Losses to Offset Gains
Billionaires often use tax-loss harvesting to reduce their taxable income and avoid paying significant taxes. By selling investments at a loss, they offset significant capital gains from other assets, effectively lowering or eliminating their tax liabilities.
According to TurboTax, any excess net capital loss can be carried over to future years, meaning billionaires who experience losses could potentially use them to offset taxes in subsequent years. The tax code enables this practice, which allows realized losses to be deducted against gains.
Investing in Tax-Advantaged Industries
Billionaires often minimize taxes by investing in tax-advantaged industries like oil, gas, and renewable energy, where government incentives provide substantial deductions—sometimes up to 100% on expenses like drilling costs. These tax breaks, designed to attract private capital to critical sectors, allow the ultra-wealthy to reduce or eliminate taxable income while supporting national development significantly.
Paired with strategies like borrowing against appreciating assets to avoid capital gains taxes, billionaires maximize tax efficiency and preserve wealth for future generations. This approach showcases how the ultra-rich legally reduce their tax burdens on a massive scale.
Exploiting Carried Interest Loopholes
Billionaires, especially private equity and hedge fund managers, use the carried interest loophole to cut their tax bills significantly. This loophole lets fund managers treat their compensation—about 20% of profits, known as carried interest—as capital gains, taxed at 20%, instead of ordinary income, which has a top rate of 37%.
Essentially, this turns payment for labor into investment income, allowing the wealthy to pay nearly half the tax rate of regular workers. Despite criticism and proposed legislation like the Carried Interest Fairness Act, the loophole remains, driven by lobbying and tax law complexities, costing taxpayers billions and fueling income inequality.
Donating to Charity for Tax Deductions
Philanthropy is a strategic tool for billionaires aiming to reduce their tax burdens. Large charitable donations can lower taxable income, allowing donors to wield influence through foundations.
Individual charitable giving is estimated to reach $385 billion in 2023, resulting in an annual revenue loss of approximately $51 billion.
Using Family Limited Partnerships
Family Limited Partnerships (FLPs) have long been popular estate planning tools. They allow families to transfer wealth across generations at discounted values, lowering gift and estate taxes. However, the IRS has increasingly scrutinized FLPs, emphasizing the need for legitimate business purposes such as asset management or creditor protection rather than solely tax avoidance.
FLPs achieve tax savings by transferring limited partnership interests, which are often valued lower due to a lack of control and illiquidity. Recently, the IRS has proposed new regulations to limit the effectiveness of FLPs, signaling a tighter stance on excessively tax-motivated arrangements.
Taking Advantage of State and Local Tax Nuances
Another common tactic among billionaires is to relocate to states with favorable tax rates. States like Florida and Texas have no personal income tax and are particularly popular.
IRS migration data show that between 2021 and 2022, 26 states with lower or no state income taxes experienced a net income shift of $39 billion from interstate migration. High-profile individuals like Larry Ellison and Elon Musk have famously utilized this strategy.
Utilizing Offshore Accounts and Entities
Offshore accounts and structures remain a popular, albeit controversial, method of tax deferral and asset protection. While these practices draw scrutiny, they are often legal.
The State of Tax Justice 2024 reports that multinational corporations are shifting an average of $1.13 trillion in profits into tax havens, where they are shielded from immediate U.S. taxation.
Disclaimer – The Finance Key does not provide and does not intend to provide financial, investment, tax, or legal advice. Information contained in this article is for informational and educational purposes only. This list is solely the author’s opinion based on research and publicly available information. The inclusion of links to third-party content is not an endorsement by The Finance Key of such content or services. Please do your due diligence and use your discretion.
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