12 Tax Secrets the 1% Use To Protect Their Wealth

We can and do make as many jokes as possible about taxes to take the edge off that financial bite. 

But the fact remains: Taxes are necessary to fund essential public services and programs that benefit all of us. However, nobody wants to pay more than their fair share, and they also want to avoid wasting money. 

Enter the 1%, who are stunningly adept at ducking lots of taxes. According to the Treasury Department, the U.S. loses about $160 billion every year from taxes that the top 1% don't pay.

While it may seem like only the wealthy have access to legal ways to reduce their tax burden, there are strategies and tips that regular people can use too.

Here are 12 secret tax tips the 1% use to protect their wealth.

Running your own business has benefits beyond being the boss. It can also help come tax time. Anything you spend related to travel, vehicles, office supplies, work-related education, and even a home office can be eligible for tax write-offs.

But be aware of the IRS’s eligibility requirements. Namely, the agency wants to know if you are trying to make a profit versus just trying to make money from a hobby.

One big way the wealthy reduce their tax burden is by taking advantage of lower tax rates on long-term capital gains. These gains are typically taxed at a lower rate than regular income.

According to the IRS, the tax rate on most net capital gains is 15% for most people, though you may pay 0%, 15%, and 20%, depending on your income.

Businesses lose money sometimes, but there are ways to take advantage of that. The key one that wealthy business owners utilize is the Net Operating Loss Carryforward IRS rule that allows them to assign losses to future years when the deduction would be more useful.

You can lower your tax burden by using the loss in one year to reduce your taxable income in another year.

Deferring your income can be used a bit like the IRS’s Net Operating Loss Carryforward rule. If you earn income but don't receive payment until the following year, you won't be taxed on it until then.

Be careful with the timing when it comes to this tactic. For example, you don't want to use it if you could be in a higher tax bracket the next year.

Depreciation is a tax deduction that lets property owners recover the cost of certain tangible and intangible assets. In short, it recognizes that property declines in value over time and lets owners claim some of the property's cost as a deduction on their tax return.

For 2023, the deduction, in section 179, caps out at $1,160,000. There are a few caveats, however. For example, the property must be used for a business or income-producing activity, be owned by the taxpayer, and have what the IRS calls a "useful life" of more than one year.

In addition to deducting business expenses, running your own company can save you on taxes if you hire your kids.

If your child is under 18, anything you pay them is not subject to Social Security and Medicare taxes. If they're under 21, their wages aren't subject to Federal Unemployment Act tax. 

The real kicker is that you can deduct what you pay them as a business expense, but their work must be legitimate, and their salary must be reasonable.

“Work smart, not hard” is a phrase that tends to induce plenty of eye rolls, but it's one way that the wealthy stay, well, wealthy.

While most of the 99% make their money from salaries and wages, top earners can be compensated through stock or options — things that can't be immediately taxed. 

There are also other strategies, such as taking part in real estate investment trusts (REITs), that can be used to generate income. Investment tactics are a good way to measure your financial fitness.

Everyone enjoys getting gifts. When it comes to tax breaks, giving gifts can put a smile on your face too.

For 2023, the gift tax exclusion is $17,000 per person, which means you can skirt the taxes you would otherwise owe on that $17,000. And do not forget that it is per person. More children and, potentially, grandchildren mean more gift money that does not get taxed.

Giving to charity helps recipients and donors: Recipients get something they sorely need, and donors get a break come tax time.

Charitable contribution limits are not done by dollar amount. Instead, it is percentage-based. Current tax law stipulates that you can usually contribute a whopping 60% of your adjusted gross income.

It might seem extreme, but there are tax benefits for living in specific locations. For example, Puerto Rico offers tax breaks for U.S. citizens who become residents — what the IRS calls a “bona fide resident.” 

You have to really live there, but as a U.S. citizen, you will pay no federal income tax on capital gains, and you won't pay taxes on the income you earn from Puerto Rican sources.

If you want to avoid state income tax, there are nine without it: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

You can duck capital gains taxes on inherited property you decide to sell. The value of, say, a house when you inherit it — not when a relative bought it — becomes the new basis for the value of that property. 

If you sell it for a profit, you will owe capital gains taxes on that profit. However, if you sell the asset right away, there will not be a profit, and, thus, no taxes.

Health savings accounts (HSAs) offer a plethora of tax benefits. For example, contributions to an HSA are tax-deductible, and you don't even need to itemize.  

In addition, the earnings in the account grow tax-free. Distributions are also tax-free if they're used for qualifying health care expenses.

There's a difference between tax evasion (illegal) and tax avoidance (legal). Knowing how to keep more money in your pocket the same legal way the wealthy do is all about knowledge and strategy.

By understanding the tactics the wealthy use to minimize their taxes, the rest of us can take advantage of the same rules and provisions to lower our own tax bills, though it may not be a one-size-fits-all solution.

The more you know, the better you can devise your own tax plans and build your wealth.