One of the most common questions I get asked is: how do rich people avoid taxes without getting in trouble? 

It’s all too common to see headlines of rich celebrities and corporations that pay close to $0 in taxes. Recently revealed IRS files found that wealthy individuals like Jeff Bezos and George Soros have paid $0 in taxes over the years. 

However, the truth is that these individuals are able to do this through completely legal means available to any investor. 

While you may not have a team of attorneys and accountants working on your side, educating yourself on common tax loopholes and laws will help tremendously. 

Rethink your tax bill strategy with these 11 ways to avoid paying taxes like the rich. 

1. Invest in a Tax-Deferred Retirement Account

Capital gains taxes for assets can be as high as 20% depending on how long you held it and how high it was worth. 

One way to circumvent these taxes is to hold your asset for longer to qualify for a smaller capital gains tax. 

However, you can avoid most capital gains taxes altogether by growing your portfolio tax-free with an individual retirement account. 

IRAs offer many of the same tax benefits as a 401(k), except Roth IRAs can be managed almost tax-free. For example, all contributions to a Roth IRA are not taxable, and earnings can be withdrawn tax-free as long as they are within the required retirement window. 

Furthermore, a self-directed IRA under a Roth structure allows you to invest in alternative assets like real estate and crypto without being taxed. 

Other retirement accounts you might be interested in include:

  • SEP IRA: Recommended for self-employed individuals.
  • SIMPLE IRA: Recommended for small businesses.

Just be sure to research self-directed IRA IRS rules to maximize the benefit of your account. 

2. Depreciation

While many people are familiar with capital gains taxes, capital losses actually work in reverse–a process known as depreciation. 

You don’t need to do anything special to benefit from depreciation. Under the IRS tax code, your assets automatically depreciate if you sell an asset at a loss. 

The simple depreciation formula requires subtracting the asset’s salvage value before dividing the asset’s cost by the estimated number of years of useful life. 

The asset’s salvage value is the total it’s estimated to be worth at the conclusion of its useful life. The number you get at the end is your depreciation expense.

Another method called double-declining depreciation allows you to bulk up your write-off of an asset’s value right after its purchase in exchange for declining deductions as time passes. 

This is a good option for a small business that’s struggling under the weight of startup expenses. The formula uses two times the number you get when you multiply your asset’s single-line depreciation rate by its book value at the start of the year.

3. Charitable Donations

Claiming charitable donations on your tax return helps reduce your taxable income for the year. 

Both cash and material donations can be tax deductible as long as the recipient is a 503(c)(3) charitable organization. So plan your donations wisely. 

For example, if you anticipate being in a higher tax bracket this year, plan a larger charitable gift carefully to minimize your tax burden without exceeding the limit. If a donation is more than 60% of your income for the year, the excess amount will be rolled over for tax benefits for the next year.

For many, donating to charity is a great way to put the money they would have paid in taxes to better use. 

Remember, keep your receipts. 

4. Long-term Investment Income

As previously mentioned, the long-term capital gains tax is substantially lower than the short-term tax. 

While the short-term capital gains rate is between 10% and 37%, long-term capital gains are tiered at 0%, 15%, or 20% for people in different income and filing brackets. 

All it takes is holding on to an asset for a whole year before you sell. 

5. Tap Into Tax Breaks in Real Estate or Similar Industries

Every industry has its own set of “secret” tax breaks. 

In real estate, 1031 exchanges allow you to continuously raise money for real estate using the sale of your previous property without paying taxes on it. 

Let’s also not forget about write-offs for property taxes, property insurance, repair costs, advertising, office space, legal fees, accounting fees, travel, and so much more. Wealthy Americans never leave these breaks and incentives on the table.

6. Step-up Basis

A need-to-know option if you’re inheriting assets, the step-up basis loophole allows you to avoid capital gains taxes on inherited property. 

When a person inherits property or assets, the IRS resets the asset’s original cost basis to its value on the inheritance date. 

While the heir will pay capital gains on that basis when selling the asset, the overall rate will be lower.

7. Gifting

Did you know that giving money to family members can lower your tax burden?

According to the IRS, a gift is not considered income for federal tax purposes unless it exceeds the annual exclusion of $17,000. 

As of 2023, the IRS allows you to give away $12.92 million in gifts cumulatively over the course of your life without ever paying gift taxes. 

Just be warned that the gift tax rate climbs to somewhere between 18% and 40% if you exceed the $17,000 cap in a single year.

8. Moving

While millionaires and billionaires hang out in the priciest zip codes in the country, they know better than to claim their wealthiest dwelling as their primary residence. 

If you currently live in a high-tax state, moving your primary residence to a home in a low-cost state can instantly boost your net worth. 

Changing tax residency is a complex process that usually requires the help of a tax expert. The biggest thing to remember is to never spend 183 days or more in a state other than the one you’ve claimed for your primary residence. 

9. Forming an LLC

An LLC helps you avoid double taxation the same way that the wealthy do. 

When you form an LLC, you’ll enjoy the structure of a pass-through entity that allows earnings to go directly to you without prior taxation. That means you’re only paying taxes on your personal income. 

LLC owners also enjoy tax deductions for business expenses, the Qualified Business Income deduction, and other perks that self-employed people don’t get without an LLC.

10. Establishing Trusts

Establishing a trust can help you to reduce taxes in the context of a wealth transfer.

The first thing to know about this strategy is that trusts reach the highest federal income tax rates at lower thresholds compared to ordinary income. That’s why proper trust management is everything. 

The trick to using a trust to reduce your tax burden is to make distributions to a trust beneficiary only if that beneficiary is in a lower tax bracket. 

11. Understanding the Tax Code

This is probably the most important aspect of how wealthy people avoid paying taxes. 

You don’t need to know all the tax laws to lower your tax rate, but it pays to know about the laws that relate to your investment decisions. 

Make sure to research various deductions and employ some of these tactics before the new tax year to lower your tax burden. 

Wealthy people don’t just get lucky with taxes. They use existing tax codes to their advantage to keep more of their money without breaking the law. 

One of the best-kept secrets in personal finance is that many of the tax-deferral options available to millionaires are available to people making minimum wage, six figures, and everything in between. 

Experiment with some of these methods to try and lower your tax burden. Remember to talk to a financial advisor first.