While many Americans sweat income tax time, for billionaires, it’s barely on the calendar. That’s because for the very richest, income plays a minor role in wealth. To lower tax liabilities, billionaires reduce their actual income to a trickle, while living off the fortune they’ve amassed in appreciating assets: stocks, real estate, and the often rapidly growing companies they own.
A study released last summer by professors at the University of California, Berkeley, found that the all-in tax rate paid by the richest Americans is 20% lower than the median American household.
Brian Galle, a professor of law at Berkeley, said on a recent “Berkeley Law Voices Carry” podcast that the median American household has a net worth of zero because it might have some assets but also substantial debts.
“So we’re talking about billionaires paying a 20% lower tax rate than a household with a net worth of zero. That’s obviously not a fair or progressive tax system,” Galle said.
Middle America relies on income — hourly wages or an annual salary. That money is taxed at increasing rates, the more you earn, starting at 10% and topping out at 37%. So working Americans are shelling out hard-earned dollars for federal income tax (not to mention payroll taxes and state and local taxes).
Here’s an example for a household earning $110,000, married filing jointly:
Gross income: $110,000
2025 standard deduction: – $31,500
Taxable income: $78,500
The first $23,850 is taxed at 10% = $2,385
The remaining $54,650 is taxed at 12% = $6,558
Total tax bill: $8,943, which equals an effective tax rate of 8.13%
Billionaires pay very little income tax, though, because they aren’t earning money from a 9-to-5. The tax rates on investment earnings and other wealth are generally lower than income tax rates.
The result: The Berkeley study determined that the richest 400 households in the U.S. pay an effective tax rate of 24%, while the rest of us pay 30%.
Want to know your effective tax rate? Use this tax bracket calculator to find out.
Many billionaires get paid in equity, rather than cash. With low salaries mitigating taxes, they own massive businesses or mountains of stock that don’t pay large dividends but grow in value exponentially over time. These assets aren’t taxed unless they are sold. It’s called the “realization” principle.
In his report, “How to Tax the Ultrarich,” Galle explains:
“Taxing only at realization means that individuals who make most of their money through investments get to choose when to pay tax … One of these options is ‘never.’”
For example, say a billionaire’s net worth grows by billions of dollars in a single year. It might be from a combination of stock gains, company growth, or real estate appreciation. If none of the assets are sold, the tax liability would likely be zero. If a portion of the assets is sold, it could be taxed at a lower capital gains rate rather than a higher income tax rate.
Then, if they graciously (tax efficiently) accept an annual compensation of just one dollar, the tycoon has virtually no taxable income.
“The result is evident in recent news stories reporting that many of America’s wealthiest individuals, such as Jeff Bezos, have reported taxable incomes lower than those of the IRS agents who audit them,” Galle said.
In fact, according to ProPublica, the income-reducing tax strategies of the top 25 billionaires allowed them to pay an effective tax rate of just 3.4%, even though their wealth increased by more than $400 billion from 2014 to 2018.
Here’s another highly effective way wealthy people escape high tax bills. By borrowing against assets, rather than selling them, the uber-rich live a “buy, borrow, die” lifestyle.
Buy: Acquire assets likely to gain value: companies, stocks, and mansions.
Borrow: Using the assets as collateral, a non-taxed income can be borrowed while the properties, stocks, and companies continue to appreciate.
Die: The assets are transferred to heirs with a “step-up in cost basis,” meaning a lifetime of appreciation is eliminated, and no capital gains taxes are ever due.
Using equities as collateral for a loan or a line of credit allows even the most creditworthy to earn more favorable interest rates. And loan proceeds are not taxable income — even the interest payments may be tax-deductible. Meanwhile, the assets continue growing in value.
“They acquire their assets, they borrow money to sustain their lifestyle, and then they die without ever paying any tax,” Galle said on the podcast.
Unfortunately, the strategies used by the ultra-rich to avoid taxes are not ones that the typical U.S. household can easily replicate. But if you own real estate or have other types of income and assets, you might be able to pull some of these levers to reduce your own tax burden.
Maximize retirement account contributions.
Donate appreciated stock to nonprofits for a tax deduction. Tax deductions lower your taxable income, leading to a smaller tax bill.
If you invest in real estate, deduct depreciation, insurance costs, and interest from your income. Again, this means the IRS is taxing you on a smaller amount of income.
Property and businesses can be held in “pass-through” entities, such as LLCs, partnerships, trusts, and S corporations, to defer taxes and shift income to lower tax brackets.
Harvest tax losses on assets to offset gains in others. Example: Sell the $500 loss on one stock and apply it to a $500 gain on another stock position you trim. The result: zero taxes.
Reduce taxable income by tracking and deducting interest, charitable donations, and business expenses.
Read more: Best tax deductions to claim this year
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