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How do the wealthy minimize their tax burden in the U.S.?

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Joined: 01/18/2012

Erik FairErik FairSoftware Engineer, Investor, s... (more) 

 
Wealthy people in the USA minimize their tax burden by following, to the extent possible, the incentives and disincentives of U.S. Tax Law, just like everybody else. That is to say, the law (i.e. the Congress and the state legislators) is telling you (and everyone else) to:

  • Invest as much as possible for the long term, and earn income from capital gains which are subject to the (lower) capital gains tax, rather than theincome tax. Look for return on investment in capital appreciation rather than dividends or other regular distributions.
  • Don't keep physical cash around, because inflation sucks.
  • Leave as little cash in retail bank savings accounts as possible (i.e. just enough for your daily/weekly/monthly living expenses), because interestincome is taxed at income tax rates. And inflation sucks! (banks never pay enough interest to beat inflation). As much of your money as possible should be invested in long term investments.
  • Don't earn wage income, because that's taxed at income tax rates, and is subject to FICA payroll taxes, too.
  • If you must earn a wage, take the after-tax proceeds, spend as little as you can (spending gets hit with sales tax), and invest, invest, invest. When your investments are large enough that you can happily live off your capital gains (less capital gains taxes), quit your W-2 job.
  • Reduce your taxable wage income as much as possible with tax deductions, e.g. max-out your 401(k) contributions. Prefer to work for a company that will match 100% of your 401(k) contributions. This is more long term investment.
  • If you're working for a pre-IPO startup, take as little cash compensation as you can (just enough for your living expenses), and as much equity compensation as you can negotiate (preferably Incentive Stock Options),provided that you believe in the probabilities of success of your employer. You're investing in your employer's company with your labor (hence "sweat equity") if you do this, and the return on investment, if properly done, gets taxed at capital gains tax rate, rather than at the higher income tax rate ... if the company succeeds (yes, this is taking an investment risk).
  • Live in a state with low total state taxes. Every state has some taxes (typically some combination of income, sales tax, and property tax), but the totals vary widely. Naturally, the governments of really pleasant, attractive places to live (e.g. San Francisco) will have higher taxes because they know that's what the market will bear (though they do overreach with regularity) - that's the tradeoff you make by living in such a place.
  • Buy a house, and keep a mortgage loan out on it so you can deduct the interest on the mortgage loan from whatever income you do earn (i.e. themortgage interest tax deduction). Be sure to buy in an area likely to seeeconomic growth and thus appreciating real estate values (e.g., not Detroit). While generally true, sometimes real estate market conditions make rentingmore economically rational than buying - do the "rent vs. buy" calculation. Further, remember that buying a house reduces, to some extent, your economic mobility (i.e. it's harder to move someplace else to take a better, more remunerative job).
  • Invest in tax-free government bonds (e.g. "municipals") because the government needs to borrow your money. The yields (interest paid) on these bonds are lower, because the total effective return is increased by their returns not being taxable. However, watch out for credit risk - government entities do default on their bonds from time to time.
  • Do contribute to non-profit charities - you can deduct some of that from your income subject to income taxes. Also, it's better to support private charities by charitable giving because they're more efficient & effective deliverers of services to the poor than their government competitors. They have to be better, because you're not forced to donate to them, and if you're not convinced they're doing good, you can stop supporting them at any time.
  • Don't smoke CigarettesCigars or consume other Tobacco products - they're taxed pretty heavily.
  • Buy as much stuff via mail-order and Internet from out-of-state vendors, thus legally avoiding sales tax and illegally evading your state's "use tax" (equivalent to the sales tax, generally ... if your state has a sales tax; some don't, e.g. Oregon (state)) just like everyone else does, because (except for car registrations) the states have no enforcement mechanism available to them to collect use taxes (i.e. it's illegal for them to open your mail and see what you're buying because of the Fourth Amendment, and the "interstate commerce" clause of the Constitution).

Ask any accountant, "what is the government telling me to do, and not do, in the tax laws?" and he'll tell you all this stuff, and more.

__________________

I go in and I'm crisp, clean and my vocals are fucking coming out like music. - Anonymous MW student

- Autismus Terminus Finis (Root Cause/Cure of Autism Epidemic)

- Called Off My Wedding & Other Turn Tail Signs Of The American Male

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Joined: 02/27/2012
Brilliant.  Thanks for

Brilliant.  Thanks for sharing homie.

Might I also suggest off shore residency to lower your tax bill by about 100k every year ;)

And recently as of 2012, we Americans have a HUGE opportunity with Puerto Rican residency.  Puerto Rico is a US territory, so you would retain your US citizenship, but be eligible for Puerto Rican tax rates.

What are the Puerto Rican tax rates you might ask?  Your business / company registered in Puerto Rico pays a whopping total of 4%.  And if you invest and make capital gains, you'll pay 0% in taxes on that.

How much then are taxes in the continental US like California, you might ask?  Federal and State income taxes in CA in the highest bracket = 53%.

FIFTY-THREE PERCENT.

Let's do some math:  I earned 1 millions dollars this year.  I'm a millionaire!!!  Okay government, what's your fair share?  $530,000.  That leaves you with $470,000.  The government literally takes OVER HALF YOUR MONEY AWAY.

God Bless America.  And God Bless California politicians for being so pro-entrepreneurial and pro-innovation.

It makes perfect sense to create a startup company in California then right?  We'll just end up paying OVER HALF OUR MONEY to the government.

I'm sorry, but Fuck You Very Much.

This whole anti-rich people mentality that's constantly being pushed out into the masses via media and government propoganda - who do these high tax rates really affect?

Does it affect the MASSIVELY rich people with hundreds off millions or billions in net worth?  No, it absolutely does not.  These people don't earn new wages, so they're not affected by the high tax rates.  Most of the money is tied up in corporations and Trusts, where all their personal dividends end up being just a few hundred thousand dollars each year.  They don't give a fuck, because they already have MILLIONS and BILLIONS of dollars in net worth.

These tax rates hurt normal people like us - we decide to become intelligent, work on self development, become entrepreneurs and bring value and innovation to the world - we get punished with HUGE tax rates.  Making it nearly impossible to become ultra wealthy.

My company making me a million plus a year gets half of my earnings taken away to pay for some rich politician's mansion (or a bomb to kill people in third world countries).

And the Ultra wealthy "1%" would love to keep it this way.  It benefits them as they pay off the politicians with policies and laws which they back - SOPA, TPP, all that shit.

Us small guys take the hit.  And we get the flack of society's unconscious anti-rich attitude.

The good news is that the American Dream still exists - outside of America.  Thank God for the digital landscape and the internet.  Time to go global guys.  Poorer countries have picked up on this and are offering so many incredible incentives for people who do their business primarily over the internet.  Register your businesses and companies offshore and think about moving to another country, or at least Nevada, Texas or Florida for no state income tax.

That, and start campaigning to take Money OUT of Politics.  All this anti-innovation bullshit stems from uber rich people and companies lobbying for reform and policies which benefit them staying in power through the "inconvenience" of the Internet age and digital landscape.  They want policies which protect them in their old business models which are ineffective and obsolete in the modern world.  If we make money lobbying illegal in politics, this removes soooo much corruption from our governement.  FFT.

https://www.google.com/search?q=money+out+of+politics

http://www.internationalman.com/articles/puerto-rico-as-an-alternative-t...

http://www.internationalman.com/tax-free-zone

People to follow if you're pro-entrepreneur and pro-innovation (follow on facebook and twitter):

International Man (www.internationalman.com)

Sovereign Man (www.sovereignman.com)

Global Wealth Protection (www.gloabalwealthprotection.com)

& check out www.zerohedge.com for non-propoganda reporting of the government's unconsciousness and corruption.

I love you guys, keep creating value and sharing information.  Stay on the self-development lifestyle and keep your mind open.  Judgement is weakness, Observation is Power.

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Joined: 01/18/2012
Is there any benefit to

Is there any benefit to pursuing Greek dual citizenship? 

__________________

I go in and I'm crisp, clean and my vocals are fucking coming out like music. - Anonymous MW student

- Autismus Terminus Finis (Root Cause/Cure of Autism Epidemic)

- Called Off My Wedding & Other Turn Tail Signs Of The American Male

Tap Or Click For Personal Coaching Information

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Joined: 02/27/2012
tax-wise?  I really don't

tax-wise?  I really don't know.  I guess the cool thing is Greece is part of the EU so you can travel, live, work, open bank accounts, etc anywhere in Europe and the UK without visas and government bullshit.