Five ways how rich people save taxes? Smart & legal ways the rich use to save tax

Do you know that in 2007 and 2011, Amazon founder Jeff Bezos paid 0 tax?

Elon Musk also paid zero tax in 2018.

Bloomberg founder and CEO Michael Bloomberg have done something similar in recent years.

On the one hand, we go that tax rates are progressive. It means the higher your income, the more you will have to pay tax.

And on the other hand, we see that billionaires are paying very little tax.

Don't you think there is some disconnect here?

I will tell you how rich people save tax legally.

And they can do this in 5 smart ways.

Be it Warren Buffet or Bill Gates, or Mark Zuckerberg.

All the ultra-rich follow these five ways.

No.1 Capital Gains Tax vs. Income Tax - low salary component.

Many entrepreneurs keep their salary or cash component very low.

You must have heard that many entrepreneurs are allowed to pay only $1 or ?1 salary compensation.

This gives them the advantage that their taxable income becomes negligible. Income tax applies to your salary or business income.

Second, capital gains tax is levied on the gains you make on realizing profits from your own equity or real estate investments.

Now you have to pay tax on your income. But in the case of shares or real estate, as long as you sell your investment, you will not have to pay any tax.

And the advantage of this is achieved by ultra-rich logs.

Apart from this, the important point is that some countries have the highest income tax slab can go up to 40-50%.

But the capital gains tax is very less in comparison to this.

For example, India's highest income tax slab is 30%, while capital gains tax is 15% in the short term and only 10% in the long term.

Now you will think that if they do not have cash, then how will they manage their personal expenses?

No. 2 Pledging equity shares

The second factor is that rich people often are pledging or pledging their equity shares, insurance policies, or immovable property.

When you raise funds by mortgaging or pledging your shares, insurance policies, or any real estate, it will be treated like a loan and therefore does not count towards your income.

And, of course, now the loan will not be taxed. On top of that, because billionaires have very strong credit, they get these loans at very low rates.

Another benefit is that the interest payment helps reduce their taxable income.

For example, Tesla was a cash-strapped company a few years ago today.

At that time, if Elon Musk had taken a huge salary, then Tesla could have been under financial stress.

Musk, therefore, made his compensation milestone based rather than monthly.

Elon puts his remuneration in the form of shares for achieving milestones.

And then Elon Musk meets his personal and living expenses by pledging the shares.

Now you are thinking that how will these people pay their interest again? Easy.

They also have substantial dividend income as they have a large stake in companies, so they cover their interest payments.

In addition, rich people often have multiple sources of income, from which they can also cover their daily expenses.

No. 3 - Donation

Whenever you donate, your donation amount is deducted from your tax outgo.

Although different countries have different rules, many rich people donate to support a noble cause and save tax.

At the same time, their taxable income is also low, and their reputation also gets a boost.

So with this, we discuss the fourth way to save tax.

You must have often heard that a billionaire has bought real estate property or expensive artwork.

It has the motive of capital appreciation. But it also helps them to save tax.

For example, rich people in the US use section 1031.

Under this, if you sell art or property, and whatever profit you get from it, if you invest that amount in the same investment, i.e., buying art or real estate property,

you will get any capital gains tax.

There are similar laws in other countries, as in India, section 54F and section 54EC.

And rich people take advantage of the law very well.

No. 5 - Reduce business income from their expense

Another smart way that smart and rich people use is to reduce their business income from their expenses.

For example, vehicle and fuel expenses, self-employed health insurance, home office, internet, and phone bills.

Rich people can do these expenses in the name of their business entity.

This will also make it easier for them to run their business, plus these expenses will also be deducted from their taxable income.

However, if you use the method to deduct your personal expenses from business income, then it is considered unethical.

That's why rich people even avoid the practice.

In addition, business owners can also deduct depreciation on their assets from taxable income.

So that's all for today. Today we saw some smart tricks that rich people use to use taxes to save tax legally.

But because of your profession or the stage of life you are in, many of these ways may not be practical for you, and you may be unable to implement them.

But the purpose of this information is very simple.

Tax planning is an important element of personal finance and money management, and you should not ignore it.

When rich people are also mindful of their taxes, then why don't we also try to know taxation and save our hard-earned money in legal and smart ways?