How Rich People Hide Their Money

- The US Department of Treasury estimates that the ultra wealthy in America are skipping out on more than $160 billion worth of taxes every year, - And we know that number is impossible to imagine. So compare that to the roughly 48 billion that Penn Wharton budget model estimates the US will be spending each year for the next decade on student debt relief. An extra 160 billion could go a long way.

- So how did a rich get away with it? Well, most of us are taxed on our income. We go to work, we earn a paycheck.

A percentage of each paycheck goes back to the government to spend on programs and infrastructure, and we use the rest to buy groceries, pay bills, and score Beyoncé tickets. - The ultra wealthy though, don't earn much of their income from a paycheck. Instead, they grow their wealth through investments, and it's only when they sell those investments that they actually owe taxes on them.

- That is, if they don't find some clever loopholes first. (playful music) - One way that the rich hide their money is by literally hiding it. Secret Swiss bank accounts or shell companies in the Cayman Islands sound like the stuff of heist movies, but some wealthy people do use foreign accounts to shield their money from the IRS's irises.

- These tax havens are attractive places to stash cash and maybe not tell the US government that it's there. First, a wealthy person or maybe their financial advisor will find a country that collects low or no taxes on foreign funds stored there. But foreign banks are still supposed to report to the US on foreign accounts held by individual US citizens.

So instead of putting an account in their own name, a rich person could form a fake company that doesn't really do anything and open accounts in that company's name. Popular tax haven countries like Panama and Luxembourg, will look the other way, while these anonymous company owners move money in and out of their accounts without reporting it to the IRS, - But like we all learn from the Wolf of Wall Street, this is pretty illegal. US law requires that citizens report all of their assets, even if they're stored abroad.

So if the IRS catches you keeping secret foreign investments, you could get in pretty big trouble. - Lucky for the rich, there are totally legal tax havens right here in the US. In addition to the taxes we pay to the federal government, the states, and even cities we live in, can collect taxes too.

So a state might collect income taxes on the money we earn, capital gains taxes on the money we make from investments, sales taxes on things we buy and property taxes on the value of our homes. But all states decide this mix a little differently. - Some states, like Washington, don't collect an income tax at all, and I'm sure it's just a coincidence that billionaires like Bill Gates and Jeff Bezos have lived there for decades and eight states, including Nevada, Texas, and Florida, don't tax capital gains either.

Wealthy people who want to pay the least amount of taxes may choose to live in a state that doesn't tax their income and investments. - In 2021, Washington State passed a law that allowed them to collect capital gains tax for the first time. Now, anyone who makes more than $250,000 selling investments, would owe the state 7% of anything they earn after that first 250 K.

- So what did Jeff Bezos, who makes billions a year selling Amazon stock, do? He moved to Florida, where he'll keep $610 million in his pocket this year by avoiding Washington's tax on his investment gains. - For people who don't wanna play where in the world is Carmen San Diego with their dollars, there's another strategy that wealthy people use called buy, borrow die.

Remember that we don't get taxed on our investments as they grow. It's only when we sell them that we get taxed, and that's why the ultra wealthy just don't sell. Instead, when they need to buy a new spaceship, they can take out loans using their investments as collateral.

- Back in 2020 when we knew Elon Musk mostly as that eccentric electric car guy, he held $548 million in personal loans. That's the money he actually used to pay for utility bills, shop for groceries, or most likely pay other people to do those things for him, while the rest of his wealth was tied up in Tesla stock. - He did this again in 2022, securing $13 billion in loans that he used to buy Twitter.

But because these billions are in loans, not income, Musk and other super rich investors don't have to pay taxes on that cash. - So the rich buy investments and let them grow, then borrow against those investments to fund their lifestyles. But what's the die part?

- If you buy stock for $10, hold onto it for decades until it grows to be worth a thousand dollars, and then die without ever selling it, whoever you choose to inherit your estate can sell that investment, - But thanks to a tax rule called the step-up in basis, your heir doesn't owe taxes on the full $990 that your investments grew while you were alive. Instead, $1,000 becomes the new starting value. And if your heir later sells the stock for $1,200, she only pays taxes on the $200 it grew after you died.

- By using the buy borrow die strategy, nobody has to pay taxes on all the capital gains that happen during your lifetime at all, which is how some of the wealthiest people in the country managed to amass billions while barely paying taxes on any of it. - But sometimes the rich do need to turn their mega investments into cash. They have some creative ways to hide that money too.

Whenever they make money selling an investment that grew, the rich might also look for losses. That might mean selling off investments that are losing money at the same time. - Any money you lost gets subtracted from what you gained, and you only pay taxes on what is left over.

If you have a lot of losses in one year, you can even wait to count those losses against income you have in the future. This strategy called tax loss harvesting helps rich people sell their investments at a profit, while making it look like they didn't really walk away with much. - Wealthy people can also find losses by structuring their fancy hobbies as businesses, whether it's training race horses, owning a sports team, developing luxury real estate, or buying a social media platform.

The ultra wealthy can afford to start or buy businesses that they don't actually expect to live off of. So when those businesses lose money, it can actually be a good thing. - In the 1980s and nineties, when Donald Trump was just a wealthy real estate developer, he reported over a billion dollars of losses from his hotels, casinos, and apartment buildings in a single decade.

- His tax returns dating back to 1985, showed that those business losses got subtracted from his income and investment gains, lowering the total he had to pay taxes on, sometimes to zero, all while getting to live in a gold-plated penthouse apartment. - ProPublica found that between 2014 and 2018, the 25 richest Americans paid only 3. 4% in taxes on their total wealth increase.

Meanwhile, the median American household pays about 14% of their total income. While this may seem crazy, strategies like buy, borrow, die, and tax loss harvesting are perfectly legal ways to hide your wealth, - There have been attempts to close some of these tax loopholes. In 2022, president Biden proposed that Americans with over $100 million in wealth would have to pay a 20% tax on their investment growth, even before those investments are sold.

- [Julia] And senators like Bernie Sanders and Elizabeth Warren introduced a bill in 2021 that would've eliminated these step up in basis rule that allows people to inherit a lifetime of gains tax free. - Still, none of these plans have been enacted into law. Legislators are still debating how to close these tax loopholes or whether to close them at all, but the ultra wealthy don't seem too worried because the longer it takes us to figure it out, the more their hidden wealth continues to grow.

- And that's our two cents. - And that's our two cents. - [Katie] Thanks to our patrons for keeping Two Cents financially healthy.

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