Bridget Sullivan Mermel CFP(R) CPA
Tax Secrets: What ProPublica reports about Billionaires can Help You Save, Too!
Updated: Dec 18, 2021
Many people feel that taxes are unfair. ProPublica recently reported how billionaires legally pay low taxes. We talk through—is there anything here you can use to help you save on taxes?
Here are some angles that billionaires are using and you can, too:
1. Keep salaries low. Pay yourself with stock options or in other ways. Billionaire W-2s don’t say $1,000,000,000. ProPublica reports that one says $80,000. They pay themselves with stock options. That’s a strategy you may be able to use, too.
2. Use Roth IRAs. We use Roth contributions, backdoor Roth strategies and Roth conversions.
ProPublica had a whole article about how one billionaire who built up his Roth using a strategy that is outlined in detail here: https://www.kitces.com/blog/roth-ira-buy-early-stage-pre-ipo-company-thiel-business-shares-prohibited-transaction-disqualified-person/#disqus_thread
3. Use charitable donations—either from donating directly or using a Donor Advised Fund or donating part of your Required Minimum Deduction to charity.
4. Don’t realize capital gains—don’t sell stocks that have gone up a lot. Get a loan from a bank or your brokerage house secured based on the value of the stock.
Bridget: Billionaires don't pay their fair share in taxes. ProPublica just came out with an investigative report, an expose about how billionaires get away with not paying money in taxes. I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I have a fee-only financial planning practice in Middleton, Wisconsin. And on today's episode of Friends Talk Financial for Planning. We're going to talk about that article and how some of those techniques might apply to you. And Bridget, I've read a little bit about it. Kind of just enough to be dangerous.
I know you've kind of dug into this a little bit, and I'm interested to hear what you found out about this article in general, and I'll tell you, it's interesting that (and not to get into policy or ethics). I read these articles, and it's like, how can I apply these things? Is there anything I can steal from these techniques and use it for the regular people that I work with?
John: And that's the one thing when it talks about not paying their fair share, that's a judgment call. We can talk about that at a later time. But it's like, here are the rules. The rules are written. And then I look at it as a professional, how can I take advantage of it for my clients? And I'm interested to hear what you found in some of your research on this and maybe some techniques that we can use with our clients.
Bridget: Yeah. Well let's talk about the rules that they're exploiting to not pay their fair share. So basically how they're gaming the system. First, low W-2s. The billionaire, their W-2 doesn't say a billion. It says eighty thousand, in one example. So they're making the same amount as their employees. So, the next thing…
John: And when we're talking, let me jump in, W-2s. We're talking, like, the salary they should get, like paychecks every two weeks. They keep that lower and use stock or other things…
Bridget: Stock options. Yeah.
John: Okay. Got it.
Bridget: To pay themselves. And then, they exploit Roth IRAs. That's another tool. They also exploit charity distributions. So they send out private foundations for their charities. And last but not least, they don't realize capital gains. So maybe they've made a lot of money on their stock of their company. They had it. They bought it when it was a private company with stock options. And then the company goes public and the price goes way up.
Bridget: So all of those gains, they don't realize it, so that means they don't sell the stock. And then what they do if they need money is go get a loan from banks or their brokerage house. They get a loan that is secured by the value of the stock. That's what they do. And that’s a technique. That's an age-old technique. That's not like it’s anything scandalous from my point of view.
John: I heard four things. One was keeping salaries low, right? Another one was taking advantage of charitable donations and how you exploit some of the things that are around that, and then Roth IRAs, like techniques with Roth.
Bridget: There's a whole separate article with Roth.
John: Yeah. And then that last one, then, was deferring gains, not realizing capital gains, meaning not selling things if you don't have to. Just a brief overview. We can't dig into all these. But if you have things that have appreciated, not selling it necessarily, if you don't have to, but maybe using it as collateral, if you have a piece of property that you can take out a mortgage on it a similar thought process for that fourth one.
Bridget: Yeah, exactly. So if you have investments, you have stocks in the Bank or in your brokerage account, you can get a loan that is secured or the loan comes after those securities if you can't pay the loan. So that's what is the underlying security on the loan similar to if you have a mortgage.
What secures the mortgage is the value of your house. Or if you have a car loan, what secures the car loan is the value of the car. So if you can't pay for the car, you get the info man. They take your car. So if you can't pay for the loan on the stocks, then they take the stocks.
John: Got it. It's interesting hearing that those are some techniques that we've used. I don't know if maybe probably common from a professional standpoint. And that's one that's out there with Roth again, we don't want to dig too deep into it, but with the Roth IRA and some of the strategies with that, it seems to me that it would be buying things. I mean what we do for clients, buying things that have really high growth potential, because then we can forgive. There're no taxes on the other end, effectively, is that what's being done by these billionaires?
Bridget: Well, that is a supercharged technique that they're using. They're somehow buying options in the Roth that the companies are issuing, and they named the specific place that they used this technique. I'm not saying that what they were doing was illegal, but that's not available to…I have not seen that widely available whatsoever.
John: But I wonder, because a regular person can buy options, not those kind of special options, right, but are there some things that our clients might do? I know we look at doing some of those. That might be worth digging into as I think about it from a professional standpoint
Bridget: Yeah. Right. Exactly.
John: Can you tell me a little bit? It's interesting hearing these things, like keeping wages low if we can for business owners, those are techniques we’ll use. Deferring capital gains; those are techniques we use with our regular clients, not the billionaires, and using tax advantaged investing and trying to maximize that, like not fancy.
John: There are some things these people on the fringes do, but some of these are really applicable to real life. What about the charitable one? Can you talk just briefly about when you talk about exploiting charities, like what types of things are those billionaires doing? And does any of it correlate with what regular people can do?
Bridget: Well, it correlates quite one on one. It definitely correlates with what regular people can do. So, they didn't outline it specifically in the article. But from what I gather, wealthy people transfer some of this appreciated stock, right, like that they've got, into a charitable foundation. They get a tax deduction for that when they do that. And then they have this charitable foundation that they can hire people at the foundation, and they can do what they want with the foundation.
Now, this foundation, as we know from other stories, are subject to rules, et cetera. But regular people, what they can do is either donor advised funds, so that's the same concept as taking appreciated stock and moving it into a donor advised fund where you can control…you get the deduction when you move the money over, and then you can distribute it at your leisure.
And another technique that we use with people is donating part of the required minimum deduction from their IRAs. That's maxed out at one hundred thousand dollars a year. So they didn't talk about that.
Bridget: I admit that billionaires do the one hundred grand a year.
John: But it seems like those things really tie in, because, as I was saying, the same thing you just said, well, we do that. We call donor advised funds mini foundations because it's kind of how they work for the concept. And so maybe to circle back. And one thing I think is really interesting that when I read these articles like this, and when you do, yeah, it's interesting from a different standpoint.
But looking at okay, what applies there, and what I heard the takeaways are keeping wages low, using those Roth IRAs, taking advantage of the charitable giving, and deferring gains on your investments. That's all stuff that we're doing for clients and that regular people can do for a different scale.
John: If I've got one hundred thousand dollars versus one hundred million dollars, right? There are different dollars, but these are the techniques that those rich folks are using that regular people can use in their lives. Right?
Bridget: Right. Exactly. That's true. And if they change the tax law, and probably…you can see that the current tax law is producing these results. And I think a lot of people are outraged by these results. Then changing the tax law is going to change some of the incentives and change the results we get. But I bet that the rich people and people that have been able to save or have even moderate amounts of wealth are going to still benefit from looking at the tax law and saying what can I do to save money in taxes.
John: That’s great. I think that is a great place to wrap up as we take a look at those four items and maybe we’ll do some future episodes to dig into some of those deeper. It’s nice to have the concept, and maybe we can get some more depth on those four topics.
And as we rap up, the number one action step, we would like to take some action steps, is to make sure to subscribe to Friends Talk Financial Planning. That helps us rise in the ratings and helps other people find this sort of information, so please do that. And then the other item is that Bridget and I are both members of the Alliance of Comprehensive Planners (ACP). ACP is a group of fee only holistic financial planners across the country, and you can find out more about people who think like us by going to acplanners.org.
Bridget: Great! And so with that I will wrap it up. Thanks, John!
John: Thanks, Bridget!
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.