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 3:46PM
That's funny because it's not the poor people paying the taxes. It is proven that  the top earners pay most of the taxes in this country. The truth is that the top 1% earners pay 37% of the taxes in this country. The top 10% of earners pay 68% of the taxes, and the lowest 50% of earners pay only 13% of all the taxes in America. SO how the he** can you people say that these people don't pay enough? I make $60,000 and I pay in over $12,000 in taxes, and at tax time, I pay in another $1,000+. I know people who only worked part time, made only around $8,000, paid in a few hundred, and at tax time got back almost $5,000. I think the problem in this country is with the people who think others should pay more to cover them and the irresponsible spending of the government. These "rich people" earned their money, even if they didn't as some here say, break their backs, they still earned it and it is theirs. Why should they be punished for doing well? If you people aren't happy with your jobs get new ones, but keep your hands out of other people's pockets, they DO NOT owe you or anyone else anything just because they are successful.
Apr 12, 2011 4:06PM

You cannot bring prosperity by discouraging thrift.
You cannot help small men by tearing down big men.
You cannot strengthen the weak by weakening the strong.
You cannot lift the wage earner by pulling down the wage payer.
You cannot help the poor man by destroying the rich.
You cannot keep out of trouble by spending more than your income.
You cannot further brotherhood of men by inciting class hatred.
You cannot establish security on borrowed money.
You cannot build character and courage by taking away man's initiative and independence.
You cannot help men permanently by doing for them what they could and should do for themselves. -Abraham Lincoln


Look at what they pay in $ amount vs. what average joe pays. Big difference!

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 3:56PM

Effective rate for the top 1%:  23

Effective rate for the bottom 47%: 0  or less than 0, since many pay nothing and get money from the IRS.

Make the poor as well as lower middle class families with children pay some income tax, and eliminate all refundable tax credits, making them non-refundable instead.

This author complains that taxes on the rich are the lowest since the 1930's...yah when liberal clowns raised the top rate to 90%!!!  That was really fair.

Flat tax rate now, no loopholes for rich or anyone else.  If you earn 100 times more you pay 100 times more.



Apr 12, 2011 4:02PM

If you didn't earn this wealth,why on earth do you think  you should share in it? It's theirs,they earned it.We all have the same opportunity in this Country to prosper.The very idea that people buy into weath distribution is scary.Work hard,play hard,and try to stay healthy and happy,and thank God for the 12 or 13% of the people that carry the idiots in Washington who keep spending like there is no tomorrow.

Apr 12, 2011 4:01PM

Anybody who believes someone paid a few hundred in taxes on an $8,000 income and got back $5,000 is an in idiot and someone you can't debate. The article shows how the super wealthy pay less and less, but why cloud  the issue with any facts, especially if the facts don't support what you already believe is the truth.

Apr 12, 2011 4:20PM

Chasper, his numbers are fact, read "Make $32K? You're in the Richer 50%" MSN Money, Oct 3, 2008 which is still available.


It's very simple really, the rich pay a higher rate on millions, and the poor and lower middle class pay a very low rate or nothing on what they make.


So if you pay an effective rate of 23% on 10 million that's 2.3 million in income tax, while someone at the bottom (single) making $10,000 gets a $5700 standard deduction + 3650 personal exemption, so he only has $650 that are actually taxed, resulting in $66 dollars owed.  But, he would get an EIC credit of $263 and a Making Work Pay credit of $400, if nothing else, so he would end up getting a handout of $597 and pay nothing in income tax.   If he paid in all year some tiny amount, he would get it all back plus $597.


So 2.3 million vs. -$597   that's how the rich end up paying almost everything.    We need to change the tax code so that the poor and lower middle class with families have to contribute something.  We can't sustain a government with only 53% of the population paying income taxes.

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 13, 2011 8:21AM
The rich don't pay taxes? Really? Which planet have you liberal morons been living on?  They contribute the majority of the tax revenue. What we can't have is 50% of the this country paying no income tax yet, consume the majority of it's benefits. Everyone should pay something in taxes.  To the person said the government creates jobs.  The government doesn't produce or create anything. They consume. When they "create" more jobs who do you think pays for those jobs? The taxpayer. When a company creates jobs they produce a product or service we need. We need a flat tax so EVERYONE pays their fair share to support this government instead of  taking from it all the time and contribute nothing.
Apr 13, 2011 5:23AM

"We do not have a deficit problem, we have a revenue problem".  Bernie Sanders-I Vermont

When he was on the senate floor discussing the budget problem in our country and the hideous wage disparity and income gap btwn the wealthiest Americans and the average working American in relation to who pays the most in taxes to the government, among other detrimental policies that led to the desperate situation we're in today.


Everything he said was spot on correct and he will be voting NO on the Republican's upcoming draconian budget bill.  I can only hope The President and the Democrats have the guts to do the same as the middle class have taken it up the A** enough already. We can take NO MORE for the top 1% so Paul Ryan can give them another 10% tax cut while axing Medicare, Social Security and Medicaid.  Sorry billionaires, YOUR gravy train is OVER.  Buck up and share the "pain" like we've had to for the last 30 YEARS!!!!!!

Apr 12, 2011 4:42PM

Wow, by some of these posts, I would say class warfare is alive and well.  Here's a fun fact - guess how many existing American millionaires inherited their money?  1.5%.  Guess what that means--most of the rich in this country made their own fortunes.  With the way the tax structure is set up in this country, beware of putting the entire tax burden on the wealthy.  When it becomes too overbearing, the wealthy will just retire and stop producing--i.e. stop paying taxes.  Atlas can only carry so much......he WILL eventually shrug.

Apr 12, 2011 5:43PM
The amount of petulant comments and sheer wretched hatred here of those who have succeeded and are wealthy are not unsurprising. Somewhere along the line we have shifted from a nation of success seekers and risk takers (both attributes required to become "rich") to a nation of bed wetters and crybabies who think they are owed something.

You want to get rich? Get off your butt and earn it. Instead of partying every weekend or hitting happy hour every night after work to "unload" use that time to gain skills; learn; experiment; go back to school; start a business; or at the very least ponder what you want to do in life. Because before you know it, 30+ years of grunting and moaning and bitching about your job(s) will have gone by and you will wonder where it went. I've seen friends and relatives do this. And I know first hand - I wasted over 10 years as a corporate grunt right out of college (that I put myself through) before pursuing my own destiny. It has rewarded me both personally and financially. 

Oh, and by the way, how come this article doesn't address the fact that half the households in the US pay ZERO federal income taxes? (Google it). Talk about one-sided.

Apr 13, 2011 6:56AM
Rich people don't produce jobs. They hide their wealth in tax cheats that are a product of the Regan-Bush-Bush presidencies. TAX THE RICH!!!
Apr 13, 2011 12:10AM

Only the jealous want to point fingers at the rich. You should read some of the life stories of a lot of these millionaires. They are hard working positive people that are driven and don't let the odds keep them down.


Since the beginning of time there have been rich, and there have been poor. Everyone does their part. Some create the jobs for millions and millions are the ones that work the jobs.


Find your place in life, stop minding everyone else's business, and take responsibility for where you are in life.


As far as the government goes, they are out of line for allowing the country to go down this path of socialism and over taxing it's citizens for the sake of trying to engineer the playing field for it's citizens.


It doesn't work, it hasn't worked in the past, and it isn't working with the current socialist in the WH.

Apr 13, 2011 7:24AM
When was the last time a poor person ever offered you a job?  If you don't like (or hate) the rich, go work for a poor person or simply start your own business.......wake-up and smell the coffee ......don't be ignorant ......the problem with socialism: eventually you run out of other people's money! 
Apr 12, 2011 4:33PM

Fallout, the guy making $35,000 if he has 2 kids and a wife, pays no income tax on the first $26,000 of his income.


So he only pays income tax on $9,000, resulting in a total tax bill of $903.   But, he would get an EIC refundable handout of $2,179, a Making Work Pay refundable handout of $400, if he was the only one who worked and $2000 refundable child tax credit handouts, so he would end up, once again like all lower middle class and poor families, and like all the poor, Paying absolutely nothing in federal income tax, getting back all he paid in all year, plus a handout of $4579 - $903 or $3676.


If the effective rate is actually 23% for that top bracket like the article says the rich guy in your example pays 4.6 million, and the $35 K guy, if he's married with 2 kids pays - $3676 in taxes.  If he even paid a dollar, the rich guy would pay 4.6 million times as much as he does in taxes.  Since he pays nothing and somehow qualifies for a handout thru the so-called Internal Revenue Service, he pays less than 1/4.6 millionth what the filthy rich guy pays.


And you clowns say the rich need to pay "their fair share" hahahahah.

Apr 12, 2011 4:25PM

Those that defend to wealthy just handing themselves all the money, prove to me that a rich guy that gets $20 million actually DOES 571 times more work than somebody working 40 hours a week, making $35,000 and paying a higher tax rate in the end.


And if it keeps going on like this, by 2040, people making $35,000 will be making $70,000, while the CEOs making $20 million will be making $250 million.


And you'll still have mental midgets saying that's fair.

Apr 12, 2011 4:35PM
What about those "rich" folks who are making just over $250K.  My wife and I made $400,000 and paid $140,000 in taxes.  We both were raised in lower class blue collar families.  I just graduated from college last year at 50 years old and my wife does not have a degree.  Why are we being penelized for our humble success.....we pay enough taxes......especiall​y when we do not have a tax revenue problem......we have a spending problem. 
Apr 13, 2011 11:17AM

apparently, the author of this article doesn't understand how taxation works in america. the top 1% of earners in america earn 19% of the revenue but pay 37% of the total tax paid in america. i can't imaging anyone who thinks this is fair. and now hussein wants to INCREASE the taxes on the wealthy. the top 10% of earners pay 70% of the taxes. this is ridiculous.

Apr 13, 2011 8:09AM

Just some more political spin to inflame the masses because an election is just around the corner.

Hint..quit spending all your money on junk and useless items and save and invest it and then you too can take advantage of the tax laws, Quit blaming everyone else because you were not fiscally responsible.

The rich get richer when you buy all that junk that is obsolete the day after you bought it.

You want to blame someone...blame yourself.


I will bet many of the people on here blaming the rich because they are poor have maxed out credit cards, Have been living beyond their means for years and have that keeping up with the Jones mentality. I will bet that those same people have never put away any money for a rainy day, Have never planned for their future and believe that the Govt is responsible for taking care of them.





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