3 Tax Loopholes the Ultra-Rich Don’t Want You to Know About

Atty. Danya Shakfeh
Published by Atty. Danya Shakfeh | Author
Last updated: March 25, 2024
FACT CHECKED by Lou Viveros, Growth & Transition Advisor
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Ideally, taxes are collected proportionately based on income earned to fund government expenditures. However, there are loopholes in the taxation system that allow wealthy individuals to pay considerably less than their actual dues.

As a corporate attorney with over a decade of practice, I consulted with experts to provide you with a comprehensive guide on how to lower your tax payments without compromising the legal aspects of the process.

Quick Summary

  • Tax deductions are made possible through charitable contributions, investment income, and depreciation claims.
  • Any individual can benefit from tax loopholes by applying the same principles on a scale that is applicable to their income.
  • According to the Internal Revenue Service (IRS), the average gross tax gap estimated per year is around $441 billion.
  • I inform clients and business associates that, inasmuch as charitable contributions are tax-deductible, the act itself is worthy and notable.

3 Tax Loopholes the Ultra-Rich Don’t Want You to Know About

There are 3 common tax loopholes the ultra-rich use all the time to avoid paying taxes.

1. Charitable Donations

Calculating how ultra rich people avoid paying taxes

Charitable donations are the number one tax loophole that ensures the rich keep getting richer.

A charitable donation is any gift of either property or cash presented to qualified nonprofit organizations.

Charitable donations aim to help these nonprofit organizations achieve their goals, usually anchored on social, public, or collective benefits.

Charitable donations allow donors to be eligible for deductions from their tax return in the following ways: 

  • You can deduct up to 60% of your annual adjusted gross income for charitable cash donations.
  • For non-cash charitable donations, you can be eligible for 50%, 30%, or 20% deductions from your adjusted annual gross income, depending on the asset being donated and the organization receiving it.
  • Additionally, if all your charitable donations for a year exceed the 60% mark, the exceeding value can be carried forward for up to five years.

Furthermore, thanks to the growing presence and use of Donor-advised funds (D.A.F.s), you can receive tax benefits immediately without the recipients of the donations receiving the gifts. D.A.F.s are not expected to meet distribution requirements or report on the specific causes donated to by particular funds.

In my experience, this means that money already earmarked as a charity donation may fail to be distributed for years, yet the donors will receive the tax benefits immediately.

How to Benefit From Charitable Donations Tax Loophole?

To benefit from charitable donations tax loophole, make regular contributions to charitable institutions, and ensure to keep a record of the donations you make.

These records may include a receipt from the receiving organization or written communication that indicates the amount donated, the date, and the name of the receiving charity.

“It is sad that so many people are persecuted for tax evasion when the rich use tax loopholes all the time.”

- Delina Chantel, Mergers and Acquisitions Specialist & Writer of Venture Smarter

2. Earn Income From Investments

Computation of Investment income

Earning your income from investment and not your job is precisely what the rich mean when they say they make their money work for them instead of working for their money.

The ultra-rich love investing in certain markets, such as master limited partnerships (MLPs), real estate investment trusts (REITs), and stocks, for two main reasons: they get to enjoy a steady stream of income and benefit from unique tax advantages [1].

The wealthy buy assets that grow in value on a tax-deferred basis and earn passive income, which is not subject to income tax.

The income generated through either of the already mentioned investment is mainly paid out to investors as qualified dividends, capital gains, or interest.

The beauty of receiving qualified dividends is in the fact that you pay tax returns at 15% on them, which is considerably lower than what you would pay as a wealthy income earner, as taxes can go as high as 37% for high-income earners.

You can also sell the stock after appreciation and remit low capital gains taxes. Depending on how much was earned, the capital gains tax rate range from 0% to 20% depending on the year.

My colleagues with real estate investments get tax breaks and be deducted from federal taxes when they are able to write off the depreciation. Consult an accountant or tax professional to assist you with the filing.

According to the IRS, 53% of taxpayers filed their taxes with the assistance of a tax professional in 2021.

How to Benefit From Earning Income From Investments Tax Loophole?

To benefit from earning income from investments tax loophole, buy stocks and receive qualified dividends, not ordinary dividends, from your investment. If you want to invest part of your income on a regular basis, you can consult with a certified broker.

Another way to earn passive income is to obtain a life insurance policy that has an investment component.

3. Claim Depreciation

Depreciation claim computation

Concerning tax, depreciation is a tax deduction that allows you to recover the cost of assets that you use in income-generating or business-related activities.

Assets such as buildings, vehicles, or machinery have a specific lifespan. Therefore, with every use, their value depreciates, and when they are no longer viable for service will need to be replaced.

This is why the depreciation tax deduction exists to cover those who use these assets for business activities.

With this understanding, colleagues of mine list their assets as items used for business purposes and expenses, allowing them to claim depreciation losses on them.

The depreciation is then written as an expense against earnings. Therefore, the income figures reduce, which successfully lowers the taxes owed.

How to Benefit From the Claim Depreciation Tax Loophole

Calculating taxes benefits from the claim depreciation

To benefit from the claim depreciation tax loophole, apply for a depreciation deduction on eligible assets, including buildings, rental properties, vehicles, machinery, copyrights, patents, and off-the-shelf software.

As the owner of any of these assets, you can make depreciation class on your tax returns as long as you identify them as assets you use for income-generating activities and ascertain that they have a useful life of a year at minimum.

Furthermore, you can claim a home office depreciation deduction if you work or run your business from home.

The current rate is a $5 deduction per square foot. The maximum size you can claim deduction on is up to 300 square feet.

Therefore, to claim a home office depreciation deduction, you will need to figure out the percentage of your home used for your income generation activities and the equivalent cost to offset that from your income. This will lower your payable tax deductions.

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FAQs

How Much Do Tax Loopholes Cost Us?

Tax loopholes cost us an average of $1 trillion yearly. This cost is an accumulation of unpaid taxes lost due to individuals and companies being able to lower their tax liabilities by taking advantage of tax loopholes.

What Is the IRS Loophole?

The IRS loophole refers to any gap or vagueness in the tax code that can be exploited to allow a taxpayer to either reduce the taxes they owe or increase their savings.

References:

1. https://www.reit.com/what-reit

About The Author

Author
Atty. Danya Shakfeh, with over ten years of experience as a corporate attorney, leads Motiva Law, offering strategic legal advice to entrepreneurs. She is skilled at transforming complex legal concepts into clear strategies, allowing clients to pursue their goals. A "Rising Star" by Super Lawyers and an alumna of Northwestern University Pritzker School of Law, Danya is distinguished in business law.
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Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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