How the top 1% use these six loopholes to skirt $160 billion in taxes each year.
Mass IRS layoffs in the middle of tax season means fewer audits of wealthy people's complex returns, which some say essentially gives rich people an unintended tax break.
Like they need one.
The uber-rich are already adept at avoiding taxes, some say. The top 1% of Americans skirt about $160 billion in taxes each year, the Treasury said in 2021. To recapture some of that revenue, former President Joe Biden armed the IRS with $80 billion over a decade to beef up IRS ranks to "ensure that everyone pays their fair share." Now, that's being undone by President Donald Trump's administration, which some say will allow the super wealthy to sneak through tax loopholes again.
What tactics, though, are uber-wealthy people using to avoid taxes?
It turns out that not only can they afford tax attorneys, accountants and estate planners, but there are also some tax benefits that require lots of money to even access. We’ll shed light on some of those strategies available only to the extremely rich.
“As long as it’s done legitimately and there’s no fraud, I’m OK with it,” said Ed Smith, senior tax and estate planner at Janney Montgomery Scott.
How much do rich people avoid in taxes?
According to U.S. Treasury estimates, the top 1% of wealthy people underpay their taxes by $163 billion annually.
How the super-rich avoid paying taxes
- Foundations
- Property
- Gifting
- Family offices
- Investments
- Moving residency
1. Foundations: Some begin with as little as $250,000, but a more feasible amount begins in the millions. They allow you an:
- Immediate income tax deduction of up to 30% of adjusted gross income (AGI) for your contribution but only to distribute about 5% each year for charitable purposes. Because that 5% is calculated off the previous year’s assets, the first year requires no distribution.
- Avoidance of high capital gains tax and the ability to grow money tax efficiently. You can deduct the full fair-market value of the stock you contribute and not pay capital gains tax. If the foundation sells, it only pays 1.39% excise tax on the capital gains.
Example: Investing $250,000 in a private foundation each year for five years, earning 8% annually, yields about $1.43 million after excise taxes and minimum annual distributions of 5% to charitable activities. Contrast this with $1.38 million had the money been invested in a taxable account and paid capital gains taxes along the way.
- Avoidance of the estate tax. Assets contributed to a private foundation are excluded from the donor’s estate and not subject to either federal or state estate taxes.
Example: If parents have combined assets of $40 million, their estate gets a $27.22 million lifetime federal gift tax exemption ($13.61 million for each spouse in 2024). The balance is taxed at 40%, the top 2024 federal estate rate, which means the estate owes more than $5.1 million.
Alternatively, the parents can contribute the balance to a private foundation that's funded when the surviving spouse dies and may no longer need the money to live. They can entirely avoid paying federal estate taxes.
2. Property: If you own property, you can benefit from depreciation, which is how much the value of an asset decreases over time due to use, wear and tear or obsolescence. Depreciation can be deducted from your taxable income every year and is a tactic President Donald Trump and his son-in-law Jared Kushner famously employed year after year to avoid taxes.
The IRS allows several types of assets that can be depreciated if used for your business such as personal property like cars, trucks, equipment, furniture or real property that includes buildings or anything else built on or attached to land. Land, though, is never depreciated. In 2023, the maximum expense deduction is $1.22 million for most property. Residential rental property can be depreciated over 27.5 years and commercial property over 39 years.
However, there are different ways to calculate depreciation, some that can be more lucrative in the short-term than others. Here are the basics:
Straight line depreciation: the most commonly used method is calculated by simply dividing the cost of an asset, less its salvage value, by the useful life of the asset. For example, if I purchased a $220,000 building to rent and the building was valued at $200,000 and the land at $20,000. I would then be able to depreciate $200,000 over 27.5 years or $7,272 annually.
Cost Segregation Study: This is when tax experts and engineers study the various components of your building – such as its wiring, plumbing, light fixtures, flooring and exterior improvements – to determine if you can accelerate the depreciation of some of them. For example, HVAC systems, parking lots and carpeting may depreciate faster, say at 5, 10, or 15 years or may even be allowed to be fully expensed in the first year. That means big deductions in the first few years and then declining as years pass, a good thing especially if you're not likely to hold a property for 27.5 or 39 years. You can reap most of the tax benefits upfront before selling.
Note: You can't take a depreciation deduction on your personal home, but the tax code includes an exemption for limited renting. It says if a property is rented out for 14 days or less in a calendar year, the income is tax free. "It started with the Masters Tournaments with golf course homes," said Mark Steber, chief tax officer at preparer Jackson Hewitt. Residents of Augusta are famous for renting out their properties for the tournament and leaving town for a spring vacation. Some large, nearby luxury homes go for as much as $70,000 per week
"They rent for 14 days and don’t even have to report it to the IRS," said Steber, who notes that this practice has broadened out to luxury ski homes and ocean front properties. Of course, you have to own and live in one of these homes first to do this.
3. Gifting:
- Annual gift tax exclusion. In 2024, the limit was $18,000; in 2025, it’s $19,000 per person. If you have three kids and 10 grandkids, times two (parents), that’s $46,800 per year to all 13 people in 2024. "That’s out of your estate and a tax-free gift,” said David Handler, Trusts and Estates Practice Group partner at Kirkland & Ellis LLP.
- Lifetime gift tax exclusion. This is separate from the annual gift. For 2024, it’s $13.61 million ($27.22 million for a married couple), and that amount generally rises each year based on inflation. In 2025, it's $13.99 million per person.
Note: The 2017 Tax Cuts and Jobs Act doubled the lifetime gift tax amount until December 31, 2025. The amount will revert to the amount of about $7 million, adjusted for inflation, unless Congress extends the act.
4. Family office: Typically, you need at least $100 million in assets to create a single-family office.
If properly structured, it can offer personalized services that include investment management, financial planning, estate and tax planning, philanthropic investing and concierge services for family members with all the tax deductions of a business. The Tax Cuts and Jobs Act of 2017 stopped individual taxpayers from deducting investment, accounting, tax and similar advisory fees until 2025, but a family office might be able to take them if structured properly.
“Big wealthy families have the capability to do this if they all agree and get along by making it a business and deducting what would be nondeductible,” said Smith.
Bonus: If your kids have skills that can be used in the family office or other business, you can hire them and pay them a hefty salary that’s expensed for the business and passed on to the kids, Smith said.
5. Investments: The average U.S. chief executive salary as of Jan. 26 was $897,916, according to Salary.com. How can that be when we always hear that CEOs earn millions per year?
In contrast to the 99% who earn most of their income from wages and salaries, the top 1% earn most of their income from investments. From work, they may receive deferred compensation, stock or stock options, and other benefits that aren't taxable right away. Outside of work, they have more investments that might generate interest, dividends, capital gains or, if they own real estate, rent.
Real estate investments, as seen above under property, offer another benefit because they can be depreciated and deducted from federal income tax – another tactic used by wealthy people.
6. Changing residency: “Jake Paul promoted it with a whole new section of the population,” said tax attorney Adam Brewer.
Brothers and social media personalities Jake and Logan Paul moved to Puerto Rico in part to avoid high U.S. taxes.
Puerto Rico is particularly attractive because U.S. citizens who become bona fide Puerto Rican residents – simply relocating doesn’t count – can keep their U.S. citizenship, avoid U.S. federal income tax on capital gains, including U.S.-source capital gains, and avoid paying any income tax on interest and dividends from Puerto Rican sources.
Normally, U.S. taxpayers would have to give up their citizenship or green card to reap federal tax benefits.
Not everyone’s ready to take that leap. But ”a lot of people move to avoid state income tax,” Brewer said.
If you're a big earner, you could benefit from no income tax especially since the Tax Cuts and Jobs Act capped at $10,000 how much state and local taxes you can deduct from your federal taxes through 2025. If Congress doesn’t act to keep this cap, state and local tax deductions will revert to unlimited.
- Alaska
- Florida
- Nevada
- New Hampshire (taxes only interest and dividend income)
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Can we get rich people to pay more taxes?
These are just a handful of ways ultra-wealthy people can legally avoid taxes. Although former President Biden proposed a national wealth tax when he took office, that went nowhere and now some states are trying to impose their own.
Each state has its own approach, but typical strategies include taxing assets and lowering the threshold for estate taxes. For example, Washington’s proposed 1% wealth tax would be imposed on the fair market value of a resident’s worldwide wealth exceeding $100 million, while Hawaii’s would be imposed on individuals, estates, and trusts with more than $20 million in assets.
Medora Lee is a money, markets, and personal finance reporter at Paste BN. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.