How the rich pay no taxes

Eleven shelters, dodges, and rolls -- all perfectly legal -- used by America's wealthiest people.

By MSN Money Partner Apr 11, 2011 12:00PM

Pay no taxes. Image: Wealthy couple (© Digital Vision/Getty Images)By Jesse DruckerBusinessWeek on MSN Money


For the well-off, this could be the best tax day since the early 1930s: Top tax rates on ordinary income, dividends, estates, and gifts will remain at or near historically low levels for at least the next two years. That's thanks in part to legislation passed in December 2010 by the 111th Congress and signed by President Barack Obama.


"This is clearly far and away the most generous tax situation that's existed," says Gregory D. Singer, a national managing director of the wealth management group at AllianceBernstein (AB) in New York. "It's a once-in-a-lifetime opportunity." 


For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate -- what they actually pay -- fell from almost 30 percent in 1995 to just under 17 percent in 2007, according to the IRS. And for the approximately 1.4 million people who make up the top 1 percent of taxpayers, the effective federal income tax rate dropped from 29 percent to 23 percent in 2008. It may seem too fantastic to be true, but the top 400 end up paying a lower rate than the next 1,399,600 or so. 


That's not just good luck. It's often the result of hard work, as suggested by some of the strategies in the following pages. Much of the top 400's income is from dividends and capital gains, generated by everything from appreciated real estate -- yes, there is some left -- to stocks and the sale of family businesses. As Warren Buffett likes to point out, since most of his income is from dividends, his tax rate is less than that of the people who clean his office.  


The true effective rate for multimillionaires is actually far lower than that indicated by official government statistics. That's because those figures fail to include the additional income that's generated by many sophisticated tax-avoidance strategies. Several of those techniques involve some variation of complicated borrowings that never get repaid, netting the beneficiaries hundreds of millions in tax-free cash. From 2003 to 2008, for example, Los Angeles Dodgers owner and real estate developer Frank H. McCourt Jr. paid no federal or state regular income taxes, as stated in court records dug up by the Los Angeles Times. Developers such as McCourt, according to a declaration in his divorce proceeding, "typically fund their lifestyle through lines of credit and loan proceeds secured by their assets while paying little or no personal income taxes." A spokesman for McCourt said he availed himself of a tax code provision at the time that permitted purchasers of sports franchises to defer income taxes.  


For those who can afford a shrewd accountant or attorney, our era is rife with opportunity to avoid, or at least defer, tax bills, according to tax specialists and public records. It's limited only by the boundaries of taste, creativity, and the ability to understand some very complex shelters.


The strategies

  1. The 'no sale' sale: Cashing in on stocks without triggering capital-gains taxes 
  2. The skyscraper shuffle: Partnerships that let property owners liquidate without liability 
  3. The estate tax eliminator: How to leave future stock earnings to the kids and escape the estate tax 
  4. The trust freeze: "Freezing" the value of an estate so taxes don't eat up its future appreciation
  5. The option option: Stock options allow executives to calibrate the taxes on their compensation in a big way
  6. The bountiful loss: Using, but not unloading, underwater stock shares to adjust your tax bill
  7. The friendly partner: With this deal, an investor can sell property without actually selling -- or incurring taxes
  8. The big payback: So-called permanent life insurance policies are loaded with tax-avoiding benefits
  9. IRA Monte Carlo: Tax advisers recommend converting traditional IRAs to Roth IRAs -- soon
  10. The venti: Putting a chunk of pay in a deferred compensation plan can mean decades of tax-free growth
  11. The exit strategy (not CPA-recommended): Death and taxes? Not for those who shuffled off to the hereafter in 2010




Apr 12, 2011 2:56PM

Nothing less than further proof that OUR REPRESENTATIVES DO NOT REPRESENT US!



Apr 12, 2011 3:24PM
The system that the rich have set up is near fool proof. If they do run into a snag, they just get their rich friends in the legislative branch of government write and pass a law for their benefit. They will attach it to the back end of another bill so that no one will notice. The middle and poor continue to work and pay the bulk of the taxes that run government and fund social programs. The rich just hang out in their crystal palaces telling the IRS they have no income and pay nothing towards helping the society that helped them get filthy rich. They are lots of regular people with sore backs from lifting these idiots up to their present positions. Aggravating, isn't it?
Apr 12, 2011 3:09PM

"Are there no poorhouses? No prisons...?"- E. Scrooge

"Yep, we're boned."- Bender

"Any society that exalts philosophy and denigrates plumbing is bound to fail; eventually, neither their philosophy nor their plumbing will hold water."

Don't remember who said that last one, but as a 'worker bee', I really like it.

Apr 12, 2011 4:15PM
The rich and poor does pay very little taxes. It has always been the middle class workers that has carried the load. Now that the middle class can't handle it any longer where do you think the money is going to come from.
Apr 12, 2011 4:19PM
Middle-class households that earned between $34,300 and  $141,900 paid 50.5 percent of all federal tax revenues in 2007 (the most recent year analyzed). This is from a CBO study.
Apr 12, 2011 4:13PM

HERE GOES..."Corporate Greed/Welfare" "Rich 'wall street' fatcats...But we never hear about....

Michael Bay - $125 million

Johnny Depp - $72 million

Steven Spielberg - $85 million

Roland Emmerich - $70 million

Will Smith - $80 million

Eddie Murphy - $55 million

Mike Myers - $55 million

Leonardo DiCaprio - $45 million
NHL - Vincent Lecavalier - $10 Million

GOLF - Tiger Woods - $10 Million

NBA - Tracy McGrady - $23 Million

NFL - Philip Rivers - $25 Million

TENNIS- Roger Federer - $8,768,110

NHL - Vincent Lecavalier - $10,000,000

GOLF - Tiger Woods - $10,508,163

FOOTBALL- Cristiano Ronaldo - $16,261,759

NBA - Tracy McGrady - $23,239,561

FORMULA ONE - Kimi Raikkonen - $45 Million

MLB - Alex Rodriguez - $33 Million


Apr 12, 2011 4:41PM
What tax breaks does the middle-age worker have?  Answer None.  At an age when you have played by the rules and paid off your mortage (tax deduction gone) and  no children for a deduction and do not have enough to itemize there is not much else you get.   For the last few years I have had to pay income tax--federal, state and local and now pay quarterly, not that I am at a higher income level (I work 2 jobs) just have no deductions.   I too know people who are lower income and get back these hugh tax refunds and spend them frivolously (vacations, flat screen TV, which I have neither)  We all need to pay our share, rich or poor, not just the ones that have no deductions or loopholes to get out of paying taxes. 
Apr 12, 2011 5:25PM

I am one of those people who are in the top 1% and started in an old apartment building.  We were very poor and I have lived the American dream financially.  One thing I know from going up the ranks is that the poor and lower middle class may not pay any or little "income taxes" but the thing people forget is that they pay a much higher per centage of their income for all the other taxes that must be paid.  A guy driving to work every day buying gas pays a higher portion of his income for the highways.  He pays a higher portion of his income for property taxes and taxes on purchases he make, licenses and the list goes on and on.  I have always felt that the guy that lives in the penthouse should be paying a lot more rent per foot than the guy in the basement. All the little income earners have paid for so much of the things that allow mw to make what I make such as the highways and sewer and water systems to name a few.  Never met an money maker that was discouraged by his rate at 30% or say 40% as most business people are gamblers by nature.  In my life the most millionaires made were when there was a strong enough middle class that had enough disposable income to buy my product.  Decrease the middle class and there will be less buyers to create success stories.


Apr 13, 2011 11:39AM
Everyone should have an equal responsibility and duty to their country.  A flat tax is what is needed if these socialists really want to be fair.  Either everyone pays the same base amount or the same percentage rate.  No tax credits, no deductions, no this tax or that tax.  You can not demand of one person and not demand of another.  You can not punish people for their success and absolve them of their failures. 
Apr 12, 2011 6:06PM
Wealth is not creating jobs not for us. We ship the jobs overseas so they can pay 3.00/hr somewhere else and they get bonuses for doing such. When they get more they keep more. I just left a job where the millionare business owner dropped wages over the last two years, continually squeezes more work, refuses to fix or upgrade equipment, refuses overtime, is trying not to pay employees a whole day for making a small mistake and thinks he cannot loose and is cocky as hell. This is what we are giving tax breaks too? The people get rich off of those of us that work hard to sell their products and services, put our sweat and hard work into everything that goes on and our repayment is to loose benefits, pay raises and future security.  Meanwhile they go after congress to pull social security and medicare off the table so they don't have to pay those matching funds. 
Apr 12, 2011 5:58PM
We need to make a distinction here between the rich and the filthy rich. It's not the guy that owns a small to medium sized business. We need more of them. They're the ones who create jobs in this country. The crime is that the filthy rich, that small percentage of Americans who control an out-of-proportion amount of the wealth in this great country, keep getting handed one break after another while the bozos in Washington continue to cut education, health care and social programs for those left behind. THERE IS NOTHING IN THE CONSTITUTION THAT SAYS WE HAVE A RIGHT TO MAKE EXHORBITANT AMOUNTS OF MONEY WHILE PEOPLE DON'T HAVE HEALTH INSURANCE! It's time American's stopped worrying about how the wealthy are getting along and start worrying about themselves.
Apr 12, 2011 3:53PM
Thank you, conservative members of congress, for your expanded corporate welfare and your generosity to the wealthy at the expense of our economy and ordinary hard working Americans.
Apr 12, 2011 6:01PM
Dr. Moon said: "The majority of people are poor because of their own actions and nobody elses. I've never had a rich person rob me."

If you've never had a rich person rob you, than you either have not been paying attention or you have no money to begin with. Rich people rob you every single day... it's interesting that a Dr. would have trouble seeing that! Ever get a cable bill? Ever pay a lawyer or insurance company? I don't blame the rich for robbing me, it's simply the way the system is designed:

There are so many poor people in our system because the system was designed that way... It's not a system shaped like a pyramid, it's the point. That tens of millions of working poor would toil, and billions of sweatshop slaves would blister and bleed... for the comfort of our ultra wealthy (and even our middle and upper middle classes to be perfectly frank).  This American capitalism actually encourages and rewards bad behavior, such as hoarding billions of dollars while millions starve or succumb to the resulting systemic violence. Such as externalizing pollution costs, resulting in profits and bonuses. Such as outsourcing labor costs to the same ends.

This has got to stop or we will be stopped... not a warning but a plea...

-starving for your humanity.
Apr 12, 2011 4:11PM
I think most peoples issue with what the rich and or corporations pay (often time nothing) is the PERCENTAGE of total compensation.  Just because your income comes from dividends or you're able to hide income using complicated offshore transactions, it is still income and should be fairly taxed.  Nothing would change with a FLAT tax, since the wealthy would still hide compensation as company assets or arrange for their political buddies to create loopholes to hide compensation offshore, etc.... You can't blame them if they can get away with it, they just buy political influence to benefit themselves, not you.  Get rid of the politicians that support them or get used to it!  Think early 1890's or 1920's!
Apr 12, 2011 9:02PM
While you guys and gals are spending time accusing one political party or "side of the aisle" for the debt, or the tax structure, you're missing what really is happening.  The wealthiest in America donate large amounts of money to both political parties, because it doesn't matter who's in office.  Both sides are bought and sold on a daily basis by the wealthy who finance their campaigns.  In turn, your congressman (yes, your congressman/woman) votes on bills based on how their wealthiest contributors want them to vote.  So, you tea party supporters, pay attention to how much money those congressmen have raised by the time they begin campaigning again, next year.  Then ask yourself, why so many people would be willing to donate millions of dollars to a candidate?  After that, ask yourself how much time they could have been spending on running the country, if they're spending nearly half of their 2 year term on the campaign trail, raising money?  Someone is benefitting no matter who is in office, and that someone is the 400 people mentioned in the article.
Apr 13, 2011 7:46AM
READ THE ARTICLE PEOPLE! The wealthy paid a higher percent of their income in the 1990s and we were not only in the middle of an economic boom, but there was actually a budget surplus. So GW Bush gave the rich a tax cut and now where are the jobs? AND LOOK AT OUR DEFICIT! Bring back 1990s tax rates, cut the deficit AND create new jobs.
Apr 13, 2011 11:39AM

Rather than judge all conservatives, or all liberals (depending on your point of view), as too stupid to understand how the world really works, I suggest we ask ourselves a simple question.  Why are there so many loopholes for the rich to exploit?  Common sense tells me it is because the ones who write the rules make sure that they are not hurt by them.  In other words, legislators make sure that the tax code takes care of them and their supporters.  (isn't the same true for Government workers' pension and health benefits?)  If we want to make it more fair, we should adopt a simple flat rate tax system in which everybody pays something, and the wealthier pay more, but I for one do not believe the government should ever get 1/2 of everything someone gets, as long as it is legally obtained.  Lastly, the government should have NO RIGHT to anyone's inheritance.  But alas, the dead don't vote.

Apr 12, 2011 6:15PM
I think most people here are mission the point....nobody wants to demonize the rich and "take their stuff." How about just make the tax codes fair and even for everyone and let the chips fall where they may. If the gov't subsidizing the rich that pisses most people off. Please show me how hiding you money overseas creates jobs.
Apr 12, 2011 4:04PM


What absolute rubbish, your figures are impossible!! Show us the unbiased source of these trumped up figures.  And sorry, rich people may have earned their money in the past but nowadays, there are way too many  scammers and thieves (Like Bernie Madoff) who abuse positions of trust or  who have managed to find loopholes and ways of making money using immoral means.  Take your crocodile tears elsewhere!

Apr 12, 2011 6:27PM
It is time to make the top 1% that have 95% of this nation's money pay their fair share. Make ALL income subject to Social Security and Medicare taxes. The people of America worked their collective asses off for the guarantee of being taken care of in their retirement years by Social Security. The greedy Bastards aren't satisfied with having 95% of the money, they want it all! Let's make OUR GOVERNMENT live up to it's promises. We need to throw the conservatives out and let them live on unemployment. No more cuts in Social Security and Medicare!
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