Taxes affect everyone, but tax planning for wealthy households can be more complex than for the average American family. Some strategies can dramatically reduce tax bills and while they’re completely legal, not everyone will know about them.
GOBankingRates spoke to some finance experts to find out about tax strategies the wealthy use — and whether the average American can also benefit from them.
Long-Term Capital Gains Advantage
Investment income held for more than a year often gets taxed at a lower rate than regular earnings.
“Wealthy investors can afford to hold assets for extended periods because they don’t need immediate liquidity for living expenses,” said Andrew Duca, founder of Awaken Tax.
By holding onto investments longer, gains grow without triggering higher taxes right away. It’s a simple approach that can make a big difference over time and gives wealthy households more flexibility than those who rely mostly on paychecks.
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The Step-Up in Basis Rule
Andrew Latham, certified financial planner (CFP) at Supermoney.com, highlighted one of the biggest advantages the wealthy rely on, the step-up in basis loophole. When someone inherits property or investments, the original purchase price is “stepped up” to the current market value, wiping out decades of capital gains. Assets can then be sold with little to no capital gains tax.
Borrowing Against Assets
Rather than selling investments, something that could trigger what’s known as a taxable event, wealthy households are more likely to borrow against their assets.
Latham described the “Buy, Borrow, Die” approach, where the ultra-wealthy can tap low-interest loans secured by stocks or real estate. Since loans aren’t taxed, this creates liquidity without raising taxable income.
“When they die, those assets pass to heirs with a stepped-up basis,” he said, “erasing the tax bill entirely.”
Tax-Loss Harvesting
Another widely used tactic is selling investments that have lost value to offset gains elsewhere, known as tax-loss harvesting. Duca noted that crypto investors can even sell an asset at a loss and immediately buy it back because a rule that normally blocks this for stocks (the wash sale rule) doesn’t apply to digital assets.
The loss lowers taxable gains from other investments, which can reduce the overall tax bill while letting the investor stay in the same position once the asset is repurchased.
Credits Reserved for High Earners
Hector Castaneda, certified public accountant (CPA) at Castaneda CPA & Associates explained that wealthy people are more likely to qualify for certain credits tied to hiring, business infrastructure and energy projects, which dramatically lower their effective tax rate.
“Most ultra-wealthy pay more tax nominally than most of the lower- and middle-class earners,” he said, “but they pay a significantly lower percent of their income.” Many Americans, who don’t run sizeable businesses or have major investments, simply don’t have access to the same relief.
Overall: How the Wealthy Structure Income
Many of the strategies the ultra-wealthy use aren’t secret loopholes, they’re simply parts of the tax code most people don’t take advantage of. “Wealthy people organize their income in a different way. They make money from real estate, investments and businesses they own — not from salaries,” Castaneda explained.
Understanding how these strategies work can help everyday Americans spot approaches that might fit their own financial situation.
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This article originally appeared on GOBankingRates.com: 5 Tax Loopholes the Ultra-Wealthy Use That Most Americans Don’t Know About
