Posted: January 25, 2022
Legally avoiding federal taxes is nearly impossible for the average American. In fact, any attempt to dodge taxes will probably result in a visit from the IRS, a hefty fine, and possibly even jail time. While the majority of Americans are forced to pay whatever Uncle Sam demands, several high-earning executives have managed to get away with paying little to none. This is mainly because executives are able to be much more creative in ways that they pay themselves and what they declare as “income”. Let’s take a look at the three main strategies that executive compensation consultants and top executives like Elon Musk use to protect their money from federal taxes. Charitable Donations One main way that executives can offset their income is by making sizable donations to charity. The newest tax law allows the wealthy to deduct 60% of these donations from their income. In addition to providing tax advantages, this strategy also generates some nice PR for many executives. Many wealthy people own their own charities, effectively completing the circle for this loophole. For example, the Bill and Melinda Gates Foundation has received over $60 billion in grant payments since its inception. It’s likely that much of this has come from the Gates family themselves. Since they own the charity, it doesn’t quite feel like they are really “donating” their money. In a way, it feels like kind of an organizational nepotism. Borrowing against stock gains Another way that executives can minimize their tax burden is by borrowing against their stock portfolios. Many of the wealthiest Americans own large positions in publicly-traded companies. These positions can sometimes be worth hundreds of millions or even billions of dollars. Over decades, these portfolios amass millions of dollars in gains. These gains are not taxed until the owner decides to sell the stock - something we know as capital gains tax. To avoid this tax, wealthy people will simply borrow money against the value of their stock portfolios. This loan provides them with the spending money they need. Additionally, instead of paying a 20% capital gains tax, they can pay about 5% interest on the personal loan. This strategy is a personal favorite of Elon Musk, in particular. Managing their assets like a business Most people earn money via a paycheck. This income is defined as W2-income and actually gets taxed by the government before you even receive your paycheck in the mail. This gives the average employee basically no way to avoid this tax. Wealthy people, on the other hand, usually own a portfolio of stocks, businesses, and real estate. To manage these assets, it’s very common to create a business entity such as an LLC. Once they’ve created this business structure, they have flexibility on how they pay themselves - and they legally use this strategy to find ways to minimize their federal tax obligations as much as possible. To learn more about maximizing executive compensation, visit our Contact Page, or contact us directly by email at email@example.com or by phone at 415-618-6060.