Updated: May 16, 2022
Did you know that the wealthiest people in our country go years without paying federal income taxes? Even the top 25 wealthiest individuals, the 0.001%, names like Elon Musk, Jeff Bezos, Mark Zuckerberg, and Michael Bloomberg, are in this group. These individuals are able to do this during years in which their net worth increases in value by the billions of dollars. Having worked with some of the most successful individuals and families, I've witnessed these tactics applied firsthand. The good news is that these highly effective tax strategies can likely be applied pre- and post-divorce for you too.
True Tax Rate
Here’ a quick background on how exceptional these properly executed strategies can be. During the five tax years that encompass 2014 through 2018, the top 25 wealthiest Americans paid a true tax rate of just 3.4%. This amounted to a hefty sum of $13.6 billion in federal taxes, but it is miniscule in comparison to the $401 billion increase in wealth for the group. In comparison, middle-class Americans in their early 40s saw their net worth increase by about $65,000, while paying about $62,000 in taxes during this same time period. This equates to a true tax rate of 95%.1
For much of my career, I have followed closely the words of Warren Buffet, piggybacking on his investment knowledge and style. Less known, yet equally stellar results have been achieved with his savvy application of tax law knowledge. The Oracle of Omaha increased his fortune from 2014 to 2018 by over $24 billion. He paid federal taxes of $23.7m during this period for a true tax rate of 0.1%!1 This rate compares to the top federal income tax rate of 37%. For many years, Buffet has claimed that the tax code should be changed. We’ll leave that to you to decide, while also noting that he plans to give away almost all of his accumulated wealth.
It’s Time to Think Smarter
Pre- and post-divorce is your time to get educated and tap into the proficiency of Buffet and the other affluent individuals aforementioned. It’s time to think about yourself and your children (if this applies). What billionaire tax strategies should you apply in your divorce? Let’s again look to Buffet. The belief in his own abilities has benefitted him and the holders of Berkshire Hathaway well. He has correctly chosen to hold tight to his company stock, not pay dividends, and keep his salary famously low (his salary has been $100,000, with no raise in decades)2. These and other more intricate billionaire tactics can be applied in many divorces to save you money.
Whether your divorce is being litigated or negotiated in a more friendly manner, the person or people on the other side of the table are likely strategizing about which assets are better to maintain for long-term growth potential, what structure the assets are held in for liquidity and tax purposes, and their cost basis for capital gains analysis. With tax changes afoot from the new Biden administration, an additional layer is involved. Many unintended tax consequences can be avoided with professional help.
Wealth creates a complex maze to navigate in divorce. An experienced hand is highly recommended to guide you through the divorce process. Contact us to schedule a free initial consultation.
1. The true tax rate is calculated as taxes paid divided by increases in wealth. The true tax rate is calculated differently than the IRS income tax rate. “The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax,” Jesse Eisinger, Jeff Ernsthausen, and Paul Kiel, ProPublica, 6/8/21. Accessed 6/9/21. https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax
2. “Warren Buffett's annual salary has been $100,000 for 40 years. Here's a look at the billionaire investor's unique compensation.” Theron Mohamed, 3/20/21, Business Insider. Accessed 6/11/21. https://markets.businessinsider.com/news/stocks/warren-buffett-berkshire-hathaway-annual-salary-compensation-40-years-2021-3-1030229588
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