would you believe me if I told you that Warren Buffett pays less tax than his
secretary you may wonder how a billionaire pays fewer taxes than an
average income earning secretary and the answer is that there are two kinds of
taxpayers those who accept taxes as a natural part of life and pay whatever
the government tells them to and there were others who do everything in their
power to avoid paying taxes let's give each of these types of people a name we
will call the willful taxpayer Paul and the tax avoider Jack to Paul when the
government comes knocking at the end of the year he doesn't see it as a big deal
earning $40,000 a year Paul hands over his $15,000 worth of
$15,000 but he sees paying taxes as a normal part of life jack on the other
hand is a medium-sized business owner who draws himself a salary from the tech
company he owns and built from scratch jack has over 50 employees working for
him and has seen his business grow year-over-year unlike Paul Jack despises
tax he thinks to himself how can the government who played no part in making
his business's success take such a huge chunk of his money for nothing to make
matters worse being taxed personally and by being a business owner jack is
subject to just about every tax imaginable such as personal income tax
sales tax excise tax property tax and investment tax with all these potential
taxes being applied to his income Jack decided to look into how big
corporations avoid paying taxes after hearing that in 2018
Amazon paid zero income tax even though they earned over two hundred billion
dollars in revenues that year determined to avoid losing a sizeable chunk of his
earnings to tax Jack looked into ways he could cut down on the amount of
corporate tax his business pays and reduce his own personal tax bill in his
hunt for tax strategies Jack came across the following techniques method number
one riding off expenses given that most rich individuals earn their fortunes
through a business this gives them the opportunity to write off expenses and
their taxable income you see most expenses you occur in your day-to-day
business operations can be written off against your income to lower your taxes
payable for example let's say you run a digital marketing agency and are in
$200,000 a year in revenues if you had no expenses then the whole $200,000
would be subject to tax however as most businesses incur expenses these costs
will reduce what amount of profits will be subject to tax for instance if you
have $100,000 worth of legitimate business expenses a year then this would
make your annual profit $100,000 instead of the $200,000 you earned in revenue
which would cut your taxes paid on your earnings by more than half
eligible expenses can include things like business meals office supplies new
laptops internet connections etc employee benefits staff training rent
and leases car expenses etc as the owner of the business if you decide to take a
trip for a conference to develop your skills in digital marketing you can
decide to write that off as well again this method of reducing your taxes
is only enjoyed by people who own businesses leaving little wonder as to
why most people who own businesses seem to be considerably richer than people
who work as employees method number two diverting income as of 2017 the United
States corporate income tax rate was reduced from thirty five percent to
twenty one percent and while this offered many companies Amazon included
the opportunity to significantly reduce their income tax payable many companies
still elect to recognize their income in countries with even lower tax rates for
instance the Cayman Islands has no income tax no corporate tax no estate or
inheritance tax and no gift tax or capital gains tax making it a pure tax
haven in short whatever you earn you keep of course without any calculations
it is obvious that this is the significant savings to any business who
can realize their income overseas but just how much would this save you if you
had set up a tax haven in this country let's say your business earned five
million dollars last year instead of paying an income tax of thirty five
percent for 1,750,000 dollars you would instead pay nothing and keep that almost
two million dollars for yourself besides allowing you to realize income tax free
the Kane have very strict banking laws designed
to protect banking privacy the country does not have any tax treaties with
other nations thus guarding the finances of its
offshore banking clients from the tax authorities of other countries
moreover offshore corporations in the Caymans are not required to submit
financial reports to any Caymans government authority an incorporation in
the Caymans is a very simple streamlined process with all these benefits
it's no wonder companies are flocking to these remote destinations to hide their
earnings method number three netting revenues against losses if you've ever
looked at the stats in favor of starting a business then you will know just how
bleak they can be the numbers show that 20% of small businesses fail in their
first year 30% of small businesses fail in their
second year and 50% of small businesses fail after five years in business
finally 70% of small business owners fail in their tenth year in business
with the chance of success in business being rather low there are still
numerous companies that succeed and make a fortune
for which they need to protect and one of the ways they do this is through the
use of loss carryforwards you see most businesses require a few years in
operation before they start turning a profit and in the years where business
is not exactly booming losses are bound to be incurred these losses while
unfortunate at the time are excellent tax avoidance tools for future periods
you see like expenses loss carryforwards can be netted against your earnings to
reduce your overall taxes payable meaning that less of your income is
subject to tax method number for issuing stock options another way businesses
reduce their taxes is by issuing stock options to its stake holders this method
is particularly convenient for businesses for two reasons number one it
is booked is an expense which will reduce profits and ultimately the amount
of money that is subject to tax and number two it does not result in a
cash outflow for the business you see when stocks are issued they are
booked as an expense for accounting purposes but no cash changes hands this
means that the company can reduce its profits through the expense and maintain
a strong cash position moreover companies that use this
strategy gain the benefits realized by incentivizing their shareholders to
further increase the stock price if you own stock in the company you worked for
wouldn't you put an extra effort in order to make the company's stock value
rise so that you could cash out your options for more money with these four
corporate tax strategies in mind jack is starting to feel more confident that he
can reduce or eliminate his corporate tax bill but he knows that he needs to
withdraw some income from his business in order to live and once that cash to
be minimally taxed so he decides to switch gears and look into ways he can
reduce his personal tax owing method number five leveraging geographical tax
laws for the past 20 years jack has grown his business in the heart of
Silicon Valley however his patience with living in the state with the highest
income tax rate in the United States has finally reached a tipping point with the
state income tax rate of 13.3% for the highest income earners Jack is seeing a
large chunk of his income being handed over to his state government with even
more being passed along at the federal level while federal taxes can't be
avoided Jack wonders what he can do to avoid
some of the other taxes he is being subject to that are eroding his personal
wealth Jack began researching other states with
lower income tax rates and was surprised to see that 7 states were income tax
free such as Texas Nevada and Florida meaning that he could save the 13.3% tax
he was currently paying and still enjoy the warmth of the Sun all year long as
Jack began looking into housing options in each of these three states he
wondered if there were other ways he could further reduce his personal tax
bill method number 6 investing in real estate part of the reason the rich
continue to get richer is that they make their money work for them and one of the
ways they do this is through real estate you see not only does owning real estate
increase your wealth by generating income but it also allows for the
reduction in taxes payable when you buy a property you are requiring a
depreciable asset and because the asset reduces in value over time from an
accounting perspective you are able to deduct depreciation and reduce the
amount of income that is subject to tax common deductible expenses include
repairs to the property and mortgage interest and the more money you spend on
expenses the more you can reduce your tax selling however once a property is
fully depreciated what do you do you sell that property and buy a new one
while selling property usually triggers tax there is such a thing as a 1031
exchange which allows you to defer the tax you
paid on selling the property if you buy a new property within 60 days of sale in
essence you can continue to depreciate your properties and then sell them in
perpetuity and never pay the tax while still being able to use the assets to
generate rental income method number seven deferring income while Jack has
looked into moving states and using real estate to reduce his taxable income he
still feels as though some of his income will need to be sheltered for tax and
another way he can do this is by deferring his income the most common tax
deferral vehicle is an individual retirement account or an IRA which
allows you to move your income into a fund and subject your earnings to tax at
a later date if you're an employee you probably use this type of account to
hold your savings and allow them to grow over time
however they also double as a solid tax avoidance strategy you see income earned
from employment is subject to tax unless that is you contribute the funds to your
IRA account in the year you contribute money into your IRA you will receive a
deduction from your taxable income or the amount you contributed this strategy
is particularly effective for high-income earners because it reduces
their tax bill during their highest earning years for instance if you earn
five hundred thousand dollars a year and are in the highest tax bracket your
income is probably being subjected to tax of up to 40% but what if you could
avoid the 40% tax and instead have part of your income only be taxed to 20%
well you can do just that using an IRA you see when you contribute to your IRA
you do not pay any tax in the year you contribute and instead pay tax when you
withdraw all the funds which is typically during retirement however
during retirement you'll probably be earning much less
than $500,000 meaning that the money you withdraw will be taxed at a lower rate
and the difference in tax rates is how much you would have saved by using this
income deferral technique with all these tax avoidance techniques in your
financial toolbox you only have one question left to
answer which type of tax payer will you be from here on out a Paul or a jack
thanks for watching
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