How billionaires avoid paying income taxes

While many Americans struggle to do income taxes, for billionaires it’s barely on the calendar. This is because, for the richest, income plays a smaller role in wealth. To reduce their tax liabilities, billionaires reduce their real income to a minimum, while living off the fortune they have amassed through appreciating assets: stocks, real estate, and the often rapidly growing companies they own.

A study published last summer by professors at the University of California, Berkeley, found that the total tax rate paid by the wealthiest Americans is 20% lower than that of the average American household.

Brian Galle, a law professor at Berkeley, said in a recent “Berkeley Law Voices Carry” podcast that the average American household has zero net worth because they may have some assets but also substantial debt.

“So we’re talking about billionaires paying a tax rate 20% lower than a household with zero net worth. Obviously, that’s not a fair or progressive tax system,” Galle said.

Middle America depends on income: hourly wages or an annual salary. That money is taxed at increasing rates the more you earn, from 10% to 37%. So American workers are shelling out their hard-earned dollars on federal income taxes (not to mention payroll taxes and state and local taxes).

Below is an example of a household that earns $110,000 and is a married couple filing jointly:

Gross income: $110,000

Standard deduction 2025:- $31,500

Taxable income: $78,500

The first $23,850 is taxed at 10% = $2,385

The remaining $54,650 is taxed at 12% = $6,558

Total tax bill: $8,943, which equates to an effective tax rate of 8.13%

However, billionaires pay very little income tax because they don’t make money working 9 to 5. Tax rates on investment gains and other wealth are generally lower than income tax rates.

The result: The Berkeley study found that the 400 richest households in America pay an effective tax rate of 24%, while the rest of us pay 30%.

Do you want to know your effective tax rate? Use this tax bracket calculator to find out.

Many billionaires are paid in stocks, rather than cash. With low salaries that mitigate taxes, they own massive businesses or mountains of stocks that don’t pay big dividends but grow in value exponentially over time. These assets are not subject to taxes unless they are sold. It is called the “realization” principle.

In his report, “How to Tax the Ultra-Rich,” Galle explains:

“Taxing only at the time of realization means that people who make most of their money through investments can choose when to pay taxes… One of these options is ‘never.'”

For example, let’s say a billionaire’s net worth grows by billions of dollars in a single year. It could be due to a combination of stock gains, company growth, or real estate appreciation. If none of the assets are sold, the tax liability would likely be zero. If a portion of the assets are sold, they could be taxed at a lower capital gains rate instead of a higher income tax rate.

So if they graciously accept (tax-efficiently) an annual compensation of just one dollar, the tycoon has virtually no taxable income.

“The result is evident in recent news reporting that many of America’s richest people, like Jeff Bezos, have underreported taxable income than the IRS agents auditing them,” Galle said.

In fact, according to ProPublica, the top 25 billionaires’ income-reducing tax strategies allowed them to pay an effective tax rate of just 3.4%, even though their wealth increased by more than $400 billion between 2014 and 2018.

Here’s another very effective way for the rich to escape high tax bills. By borrowing against assets, rather than selling them, the super-rich live a “buy, borrow, die” lifestyle.

• Buy: Acquire assets that can gain value: companies, stocks and mansions.

• Borrow: Using assets as collateral, you can borrow untaxed income while property, stocks and businesses continue to appreciate in value.

• Die: Assets are passed to heirs on a “cost-up basis,” meaning a lifetime appreciation is eliminated and capital gains taxes never have to be paid.

Using stocks as collateral for a loan or line of credit allows even the most creditworthy to obtain more favorable interest rates. And loan proceeds are not taxable income; Even interest payments may be tax deductible. Meanwhile, assets continue to grow in value.

“They acquire their assets, borrow money to maintain their lifestyle, and then they die without paying any taxes,” Galle said on the podcast.

Unfortunately, the strategies used by the ultra-wealthy to evade taxes are not strategies that the typical American household can easily replicate. But if you own real estate or have other types of income and assets, you may be able to use some of these levers to reduce your own tax burden.

1. Maximize retirement account contributions.

2. Donate appreciated stocks to nonprofit organizations for a tax deduction. Tax deductions reduce your taxable income, resulting in a smaller tax bill.

3. If you invest in real estate, deduct depreciation, insurance costs, and interest from your income. Again, this means the IRS is taxing you on a smaller amount of income.

4. Property and businesses can be held in “pass-through” entities, such as LLCs, partnerships, trusts, and S corporations, to defer taxes and shift income to lower tax brackets.

5. Harvest tax losses on assets to offset gains on others. Example: Sell the $500 loss on one stock and apply it to a $500 gain on another stock position you cut. The result: zero taxes.

6. Reduce taxable income by tracking and deducting interest, charitable donations, and business expenses.

Read more: The best tax deductions to claim this year