Tesla chief Elon Musk recently requested While campaigning for President-elect Donald Trump, he said he was the largest individual taxpayer in history. Musk claimed to have paid over $10 billion in taxes to the Internal Revenue Service (IRS). The billionaire jokingly said he wished the IRS would even send him a small, inexpensive prize won by kids in karate competitions. While he sighed that he didn’t get anything, he explained that he was happy to pay taxes for society in general.

But ProPublica analysis IRS data from 2014 to 2018 revealed that Musk paid no federal income taxes in 2018. Even more surprising, Michael Bloomberg was able to claim over $1 billion in deductions and pay taxes at one of the lowest rates. Between 2013 and 2017Bloomberg deducted an average of $409 million a year from state and local tax liabilities. Even billionaire investors like Carl Icahn and George Soros have avoided paying taxes for several consecutive years, despite massive net worth growth over the same period.

Higher Income Doesn’t Always Mean Higher Taxes for the Super Rich

A few years ago, ProPublica conducted an internal analysis of the net growth of the 25 richest Americans compared to the amount they paid in taxes between 2014 and 2018. The research found that their collective wealth increased by $401 billion during that time, but they paid out only $13.6. Federal income taxes were in the billions of dollars over those five years, meaning the real tax rate was only 3.4%. Although you must pay higher taxes in America as your income increases, high-net-worth individuals (HNIs) often utilize strategies to save on taxes that are beyond the reach of ordinary people. This way they can significantly reduce tax rates. The rich often derive their wealth from the appreciation of assets such as stocks or real estate. It is important to remember that capital gains from stocks and real estate appreciation are not taxable unless sold. ProPublica, by contrast, found that middle-class American households with paid workers in their 40s witnessed an average increase of $65,000 in after-tax net worth between 2014 and 2018, primarily due to increased home value. Moreover, considering most of their earnings were wages from their jobs, they paid an average of $62,000 in taxes over the same period.

Even though HNIs like Musk claim to pay billions of dollars in taxes, they can reduce their tax liabilities because most of their net worth is tied to assets they own. From 2014 to 2018, Musk’s wealth increased by $13.9 billion, but his total reported income was only $1.5 billion, leading him to pay over $450 million in taxes with an actual tax rate of 3.27%. Meanwhile, Warren Buffett’s net worth increased by $24.3 billion over the same period, but his reported income was only $125 million. Overall, the Berkshire Hathaway chairman paid only $23.7 million in taxes, with a real tax rate of 0.10%.

The Most Popular Strategy Hnis Use to Avoid Taxes on Retirement Savings

The U.S. Treasury estimates that more than $150 billion in taxes owed by the top 1% go unpaid each year. They can achieve such tremendous tax savings by taking advantage of various strategies, including tax-advantaged retirement plans. Traditional 401(k) accounts are among the most popular retirement investment vehicles in the U.S., which grow your pre-tax money from your paycheck completely tax-free and can be withdrawn penalty-free once you turn 59 ½. Those without access to 401(k)s often choose individual retirement accounts (IRAs), which offer similar benefits to a 401(k) but have a lower annual contribution limit of $7,000 for 2024. While many choose IRAs, given the wide range of investment options and annual tax benefits as pre-tax contributions increase over time, account holders pay taxes on withdrawals in retirement because they are considered regular income.

Rich people like PayPal founder Peter Thiel create backdoor Roth IRA accounts to avoid taxes on retirement withdrawals. Thiel is known for growing his $1,700 Roth IRA account to $5 billion over the years, and he won’t pay any taxes when withdrawing from it. Roth IRAs accept after-tax contributions and ensure that your subsequent withdrawals are tax-free. However, only individuals with modified adjusted gross income (MAGI) $161,000 You are eligible to establish and contribute to a Roth IRA account in 2024. HNIs often bypass this income limit by making a backdoor Roth IRA, which requires converting your traditional IRA to a Roth IRA. During this process, they pay taxes only once on their pre-tax contributions and capital gains to their traditional IRA. When funds are transferred to a Roth IRA after appropriate taxes have been paid, account holders never pay taxes on withdrawals.