Most billionaires don’t get to where they are by earning a salary. And that also means they might pay less income tax than Americans who make a living through wages.
According to a report from ProPublica, some billionaires in the U.S. paid little or no income tax relative to the vast amount of wealth they have accumulated over the years.
The report noted that Amazon.com Inc. Founder Jeff Bezos “did not pay a penny in federal income taxes” in 2007 and 2011. It also pointed out that Tesla Inc. CEO Elon Musk paid no federal income tax in 2018 and investing legend George Soros did the same “three years in a row.”
To be sure, billionaires do pay taxes — it’s just that the amount is rather small compared to how much money they actually make. For instance, ProPublica’s report showed that between 2014 and 2018, Bezos paid $972 million in total taxes on $4.22 billion of income. Meanwhile, his wealth grew by $99 billion, meaning the true tax rate was only 0.98% during this period.
The reality is, billionaires build their wealth from assets — like stocks and real estate. Their net worth goes up when these assets increase in value over time. But the U.S. tax system is not designed to capture the gains from such assets: Capital gains are typically taxed at lower rates than wages and salaries.
But of course, you don’t need to be in the three-comma club to invest in these assets.
Check out:
Getting A Piece Of The Action
For many well-known billionaires, the bulk of their wealth is tied to the companies they helped create.
If these companies are publicly traded, retail investors can hop on the bandwagon simply by purchasing shares. For those who want to follow Bezos, check out Amazon (AMZN). If you want to bet on Musk, look into Tesla (TSLA).
Here’s the neat part: When stocks go up in value, investors only pay tax on realized gains. In other words, if an investor doesn’t sell anything, they don’t have to pay capital gains tax even if their stock holdings have skyrocketed in value because the gains are not realized.
According to ProPublica, that’s why some billionaires choose to borrow against their assets instead of selling them. Doing so gives the ultra-wealthy money to spend while deferring taxes on capital gains indefinitely.
That said, when they do sell their shares, they can still get hit with a substantial tax bill. After Musk sold a ton of Tesla shares in 2021, he tweeted that he would pay over $11 billion in taxes that year.
Another popular option for billionaires is real estate, which comes with plenty of tax advantages as well.
When you earn rental income from an investment property, you can claim deductions. These include expenses such as mortgage interest, property taxes, property insurance and ongoing maintenance and repairs.
There’s also depreciation, which refers to the incremental loss of a property’s value as a result of wear and tear. Real estate investors can claim depreciation for many years and accumulate significant tax savings over time.
The best part? The segment is becoming increasingly accessible to retail investors. There are publicly traded real estate investment trusts (REITs) that own income-producing real estate and pay dividends to shareholders. And if you don’t like the stock market’s volatility, there are also crowdfunding platforms that allow retail investors to invest directly in rental properties through the private market.
Read next:
Photo credits: Shutterstock, Flickr
Don’t miss real-time alerts on your stocks – join Benzinga Pro for free! Try the tool that will help you invest smarter, faster, and better.
This article How Billionaires Like Jeff Bezos, Elon Musk and George Soros Pay Less Income Tax Than You – And How You Can Replicate The Strategy. It’s Legal originally appeared on Benzinga.com
.
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Source: finance.yahoo.com