BusinessWeek: How to Pay No Taxes: 10 Strategies Used by the Rich

BusinessWeek recently posted an interesting article discussing some strategies used by the ultra wealthy to avoid paying taxes.  Some of these techniques hold lessons which are useful for more than just the ultra wealthy.  And several of them are simply about avoiding estate taxes rather than income taxes (which don?t help much when the vast majority of folks aren?t going to be paying any estate taxes anyway).  But it?s worth reading.
In my own blog post about this article (wherein I discuss at greater length the specific 10 techniques the article lists), I demonstrate how the headline numbers so often used in the press can be terribly misleading, by showing how taxes as a percentage of AGI can be very different from taxes as a percentage of taxable income (in my example, I use a large charitable contribution to do so, though I note that making large gifts to charity is *not* one of the techniques the article discusses!) Anyway, there are a couple of techniques in there which are worth considering for non-ultra-wealthy people (if they have some cash available): One which may be (somewhat) controversial is the use of permanent life insurance (especially if owned by an irrevocable trust). The other is deferred comp, which the article makes sound like something out of the reach of normal everyday people (which, of course, it's not - for most folks it simply means maxing out their 401(k) - which most folks don't do). And there's tax-loss harvesting, which the article complicates by mixing in wash-sale rules, but anyone with taxable investments should be keeping an eye on losses and harvesting when it makes sense. Enjoy.
David S. Meyers, CFP®
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David S Meyers CFP
Re: Business Week article
Someone once advised, "Don't ignore taxes, but do not make investment decisions based on tax strategies." That would seem to fit with your analysis. Another point often overlooked is the size of the tax bill in dollar amounts. I've seen "wealthy" individuals' tax payments, and they're huge. There are ways of deferring taxes, and maybe even some advisor-costly ways of reducing tax bills IF the tactics work, but in the end, taxes are paid. The wealthy pay higher rates on their incomes at the Fed level, usually live in high-tax locations (NYC, L.A.) and pay 10%-15% State taxes, plus municipal taxes and property taxes. The wealth accumulated - which often employs 100's of people and benefits the economy in that very good way - then becomes subject to estate taxes, and one pays applicable rates on after tax dollars. Add up all the taxes paid on the same dollars, and you get a percentage easily over half of your money paid to Government.
The simplicity about too much government is similar to the advice I got regarding taxes and income and investment: when you reward people for not working, or for being victims, or for engaging in "tricky" borrowing, INSTEAD of rewarding them for being productive, honest, and wise with their savings, you get people who are less productive, honest, and wise with their savings. In fact, you get people frantic about money, or even not believing in the honesty of money as a medium of exchange, making bad decisions leading to bubbles and crashes, and that is NOT good government.
I wonder what effect a max-tax dollar amount of $1,000,000 a year would have? If the super-rich knew that all income, or capital gains, or other, of over $4,000,000 a year would be tax-free, would a certain new mind-set about making ever larger amounts of money set in, and perhaps rein in some of these $100 million dollar CEO "packages" on nothing more than common sense and surplus and maybe a tinge of guilt? If you actually got to keep what you made, 100% of it (horrors - what a notion!), would that restore some sanity?
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A couple of things. First using large donations is only for the wealthy and buying life insurance with an irrevocable trust as the owner is for estate tax planning only. I do like the idea of using permanent life insurance for estate planning though. There are quite a few good plans available out there, one being indexed universal life and another being dividend paying whole life with the paid up addition rider so that cash grows quicker and stronger. For the common man to invest in the stock market and hope and pray that one day he/she has enough money to retire is a shot in the dark. Nobody knows when the stock market is going to go on a down swing and it always happens at the most inopportune time. With permanent life insurance you at least have a guarantee that your money will be there for you when you get ready to retire. Secondly if premature death happens, there is a death benefit for your family.
Lastly, investing into a 401k or IRA is not the smartest way of investing for retirement. Would you rather pay taxes today on a small amount of money or taxes on a large amount later, not to mention the threshold tax that you have to pay on your social security.
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Really? Tell that to my sister. I pushed her to max her 401(k) as best she could. At 40 she became disabled, $300K all pretax. She's able to withdraw the full $12K (4%/yr) at no tax as her medical out of pocket, exemption and standard deduction wipe out the $12K. Much of it went in while she was still married and a 25% bracket. The $300K pretax is worth far more to her than $225K post tax.
Tell it to my Mother in law. 28% while working and hubby still living. Now, 15%. Again, standard deduction, exemption, medical. And some room to convert a bit to Roth each year to top off that 15% bracket.
Your comment is misguided, misleading, and another mis, I'm sure, to complete the alliteration, but I'm getting old myself and slowing down.
Either way, finance is not one size fits all, and to be sure, the above (your comments) certainly do apply to some, but I dare say, not most, of the people you're targeting.
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Hopwood04 writes:
You realize that multiplication is commutative and associative?
[principal * (1 - tax)] * growth = (principal * growth) * (1 - tax)
On top of that, the "growth" in the 401K/IRA case will actually be higher because there's no tax drag on compounding (since (1 + r)^N is always larger than [1 + (r - something)]^N)
So (cancelling out "principal" from both sides and with ">?" meaning "is it greater than?") it's really:
(1 - taxNow) * growthTaxable >? (1 - taxLater) * growthPretax
growthPretax >= growthTaxable always and then you have to make your assumptions about taxNow vs. taxLater.
Now, what assumptions you make about taxNow vs. taxLater can absolutely tip it either way! But if you assume the same rates now and in the future and conservatively assume pretax growth will be the same as aftertax growth, "taxes on a small amount of money now" and "taxes on a large amount of money later" turn out to be equivalent.
Rich Carreiro                            rlc-news@rlcarr.com
Reply to
Rich Carreiro
Certainly not valid for my case. In 2009, the last full year I worked, my taxable income was 68.4% of my AGI, resulting in a nominal Federal tax rate of 9.19%
In 2011, with my income consisting of mostly Social Security, plus some IRA withdrawals and annuity incomes, my taxable income was 40.5% of my AGI, resulting in a nominal Federal tax rate of 4.29%
I'm a single guy with income slightly above my state's per capita, no kids, with a mortgage and car payments.
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bo peep

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