By Ryan Velez
It’s been a longtime known fact that the extremely rich will do whatever they can to minimize their tax payments, including exploiting legal loopholes. What isn’t known is that some of these techniques and ideas can be used by anyone, even the middle class. One example is billionaire Warren Buffett. While his savvy of the tax rules leads to him paying fewer taxes than many average people, Celebrity Net Worth reports on some of the things that can actually benefit everyone, provided they understand the rules.
One thing to note is that investments and income are not the same as far as taxes are concerned. Last year, Buffett reported $11.6 million in gross income and paid $1.85 million in federal income taxes, with a tax rate that already seems low at 16%. However, when you realize that his net worth actually grew $12 billion in 2016, the tax rate drops to 0.002%. How is this possible? Income from investments, such as capital gains and dividends, is taxed lower than earned income. Virtually all of that $12 billion growth Buffett had last year was in stocks, none of which are considered income by the IRS.
Another thing you may want to consider is using your retirement account to help lower your taxes. Anyone who contributes to a traditional IRA can set aside $5,500 to be deducted from their taxable income. This increases to $18,000 for a 401(k), and certain pension and self-employment plans allow higher contributions still. Those who are over 50 have the opportunity to contribute further money. As an example, a 50-year-old business owner who earns $300,000 in profit can shelter up to $60,000 of it in a tax-deferred retirement account. This allows them to avoid paying taxes on that $60,000.
One technique that may favor the wealthy a bit more, but can still technically be used by all, is using donations as a way to get deductions. Note that if you choose this route, the best choice may not be to donate straight cash, but instead use appreciated assets, such as stock. Look to Buffett, who has pledged to give virtually all of his money to charity and makes his annual donations in Berkshire Hathaway stock. The result is that he never has to pay taxes on his capital gains, and can deduct the full market value. Don’t be afraid to think like a billionaire when it comes to your taxes, as you may be able to save more than you think come tax time.