Smart TaxesSmart Taxes

Facebook billionaire's tax bill: Zero?

With a salary of only $1, founder Mark Zuckerberg may not owe Uncle Sam anything. And there are strategies that could keep him from ever paying income tax again.

By MSN Money Partner Feb 3, 2012 8:05PM

This post is by John Carney of CNBC.com.

 

Next year Mark Zuckerberg’s base salary will receive a dramatic pay cut -- going from a base salary of $600,000 to just $1.

 

Which raises the question: Will he ever pay taxes again?

 

Zuckerberg’s salary cut is similar to moves by other tech titans. Google’s Eric Schmidt and Larry Page are paid annual salaries of just $1 apiece. Steve Jobs took just $1 in annual salary from 1997 until his death last year. Other members of the 1%/$1 club include Oracle’s Larry Ellison and Hewlett-Packard’s Meg Whitman.

 

Zuckerberg was paid a base salary of $500,000 in 2011 and is set to be paid a base of $600,000 this year. He got a cash bonus of $250,000 for the first half of 2011 and will likely receive a similar bonus for the second half.

 

Interestingly, he was alone among the top executives at Facebook who got no stock awards for 2011. The board -- which is controlled by Zuckerberg himself -- decided that he had enough stock to align his interests with the other shareholders, at 28.2% of the company.

 

Zuckerberg’s pay cut could reduce his income tax burden to nothing.

 

It’s possible that he might even be eligible for certain types of government aid for those with low incomes -- although it’s unlikely that he would seek to collect it. (Post continues below.)

In order to reduce his tax burden to zero, Zuckerberg would have to forego any future cash bonuses or additional stock awards. He would also have to stop employing certain Facebook services for personal use. Last year, for example, he had imputed income from the use of aircraft for personal use of about $692,679. He also received $90,850 in estate and financial planning from Facebook.

 

Can Zuckerberg really live without income?

 

He almost certainly can. There’s no evidence that he has an exceptionally expensive lifestyle. His biggest annual expense is probably all that flying around. The income he has already received and been paid will go a long way.

 

Of course, his past income will not really be enough to see him through all of his expenses for his entire life. For those he will need a line of credit, preferably one with a tax advantage, and income that can be earned tax-free.

 

People sometimes talk about the rich "living off the interest" of their wealth. But that’s not a tax-efficient way to live if you are really, really wealthy. It’s better to live off debt and muni bonds.

 

The best thing for Zuckerberg would be a home equity line of credit -- perhaps multiple home equity lines. By borrowing against the value of real estate he owns, the money he receives from the HELOC is debt rather than income, which means it isn’t taxed. Even better, the interest he pays on the HELOC can be used to offset other income he may earn.

 

Zuckerberg will also be able to access credit secured by his Facebook holdings -- which will amount to billions of dollars. These lines of credit will not be tax-advantaged -- no deduction for interest payments -- but they will supply him with spending money that will not be taxed.

 

When you have the net worth of Zuckerberg, you can live for a very, very long time on tax-free debt that you can use as income. Let’s say that Zuckerberg needs $2 million of spending power per year and lives an additional 60 years. That’s $120 million of spending. If he gets an interest rate of 4% and just rolls it over as new debt, he’ll eventually accumulate around $520,919,997. Some of that interest, of course, may be deductible against other income.

 

The might seem like a lot of debt. But for Zuckerberg -- who will likely be worth around $25 billion after the Facebook IPO -- it’s a drop in the bucket. What’s more, if Facebook continues to grow, Zuckerberg’s worth will grow along with his debt. Thus, his debt burden will be negligible compared with his net worth. The unimaginably rich really are different from the rest of us.

 

Zuckerberg could also use the money he has earned, some from his HELOC and some from other loans, to purchase income-producing, tax-exempt municipal bonds. The interest on the HELOC would be tax deductible -- producing a double tax advantage.

 

The interest on the other loans would not be -- but the income from coupon payments from the muni debt would be. He could even use the income from the munis to pay some of his interest expense, which would substantially reduce the lifetime accumulation of debt.

 

The best way for Zuckerberg to meet large expenses -- for instance, if he wants to buy an island in the Caribbean -- would be to cash out some of his Facebook shares. He would pay only 15% in capital gains taxes on these.

 

Perhaps most bizarre, Zuckerberg might be eligible for an Earned Income Tax Credit if he keeps his personal income under $13,000. To be honest, that might be hard to do since a guy like Zuckerberg can produce that income by taking a company car home at night. And, in any case, it’s unlikely that Zuckerberg would find it worth the time to even file for an EITC that maxes out at just a few hundred dollars.

 

To be clear, I have no idea what kind of plans Zuckerberg has for his future income and taxes. He may not want to accumulate debt for his entire life. Perhaps he has plans to become a big spender and will need to derive income beyond what he can get from muni bonds. But it’s very likely that at least some of the $90,850 worth of financial advice Zuckerberg received went to minimizing tax exposure.

 

More from CNBC.com and MSN Money:

VIDEO ON MSN MONEY

10Comments
Feb 4, 2012 7:57PM
avatar

SHOW ME, the aVERAGE HOURLY EMPLOYEE HOW TO GET OUT FROM UNDER THE YOKE OF OPPRESSIVE US INCOME TAX, FICA TAX, STATE INCOME TAX AND BRING IT On!

AS LONG AS THIS NATION IS SUBJUGATED TO A GANGSTER GOVERNMENT AND AN UNBELIEVABLE TAX CODE THERE IS LITTLE HOPE ...!

Feb 7, 2012 10:07AM
avatar
Doesn't bother me in the slightest. Whatever he did, however he did it, the tax code gave him the ways and means to get it done. The answer is not taxing the rich. It's a basic fundamental, section by section, overhaul of our tax system. Our government talks the talk, but doesn't walk the walk. One other poster stated it this way---so it's his post---every 4-8 years we hear this same tax overhaul garbage and nothing ever gets done about it. BO's battle cry has been, is, and will continue to be---tax the rich. He's right.  It's not class warfare. It's stupidity. 
Feb 14, 2012 2:20PM
avatar
flat tax with no deductions. if we are worried about lower incomes then only tax earnings over a determined amount. of course limousine libs and right wing nut jobs will not agree with this because it is fair to all parties concerned. all incomes should be taxed at same rate ( CG, interest, wages, etc.)
Feb 7, 2012 4:44PM
avatar
Isn't Zuckerburg and Obama buddies.  He is supporting Obama anyway.  The 2 Americas Obama talks about are the democrats.  Zucker made approx 20 some billion and is not going to pay any taxes.  Typical democrat do as I say not as I do.
Feb 14, 2012 5:28PM
avatar

Worker 1, Zuckerberg is actually paying over $2bil in taxes based off of the Facebook IPO. 

 

He may or may not be supporting Obama, but he is certainly supporting the US with a tax bill that high.  He is providing a lot more support than your taxes are.

(I don't generally like to make assumptions, but judging from your horrible grammar and lack of a coherent thought process, I assume you don't earn a whole lot.)

Feb 14, 2012 2:37PM
avatar
One thing the article does not mention is that HELOC interest is only deductible if it is used for Home Improvements.  I.e. You cannot deduct the interest if the proceeds are used for living expenses.
Feb 8, 2012 2:11AM
avatar
And to keep giving the most wealthy huge tax cuts Wakeup isnt class warfare? Cutting taxes for  the rich by 50% since 1980 isnt class warfare?
Mar 16, 2012 7:08PM
avatar

People speak as if they understand tax law and it kills me.

 

I'm a CPA with my Masters in Taxation who has done thousands of complicated tax returns over the years.  Let's get something straight:  stock options given by your employer are taxed at ORDINARY tax rates.  It's only the appreciation of the stock after exercising the options that gets hit at the 15% capital gain rates.

 

Also, for the idiot MSN journalist here who is spewing myths and contracdictions.  HELOC interest is tax deductible, yes, but for someone who has all that imputed income from using company resources for personal purposes (flying, estate advice, etc.), the Alernative Minimum Tax will not allow Zuckerburg to deduct that interest.  Even on a first mortgage though, only the interest on about the first million of debt is even tax deductible. 

 

MSN, my wealthy clients would never take debt out to fund their living expenses when they will have to pay interest on the borrowed money.  They will use the vast wealth they've accumulated and its earnings to fund their lifestyles, taxes or no taxes.  Even if the HELOC interest could be deducted, which it can't as I've already discussed, how are you getting ahead when you are paying interest on the borrowings?  Yes, their money may earn more in investments than the 3%-7% HELOC rate, but given how hard it's been to earn a decent rate of return in the market lately, my wealthy clients just use their own money.

Feb 4, 2012 10:42AM
avatar
So you think that the $$$ that has already been taxed at least once, should be taxable at a higher than 15% rate?  Just because they made a lot of money...  That is the definition of class warfare.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.