How The Super Rich Avoid Paying Taxes
If you’re one of the 1% of Americans who control over 40% of the country’s wealth, life is full of choices. Among them — how best to keep all that money away from the government? The U.S. economic system offers no shortage of loopholes allowing the ultra-rich to shortchange Uncle Sam.
Tax rates for those making > $1 million level out at 24%, then declines for those making > $1.5 million. Those making $10 million a year pay an average income tax rate of 19%. $70-$100 billion is the estimated tax revenue lost each year due to loopholes. So how exactly do the super rich hide that much money from the government every year?
How Not To Get Double Taxed
To avoid double tax, you must adjust the initial basis by adding any compensation included on your form W2 upon the exercise of the option. On the date of exercise, ordinary income is created for the difference between the strike price and the fair market value per share of your employers stock if you exercise a nonqualified stock option.
If you exercise an incentive stock option and do a same day sale, you will create ordinary income for the difference between your strike price and the fair market value per share. This income is reported on your form W2. If you do not adjust the basis on your tax return, then you will overstate your capital gains by the amount of stock option compensation included on your Form W2. In years prior to 2014, the form 1099B usually reported the correct tax basis which included the adjustment for any Form W2 income.
Contribute To An Resp
An RESP is another tax-shelter in which you can avoid capital gains tax. Since you plan to use that money in a short-to-medium term horizon, for your childs education, youll likely want to invest in low to medium risk securities. Your child will pay tax on the withdrawals but since their income is likely going to be very low the rate will be minimal. Youll have to close down the account in the 35th year after you opened it.
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Faq: The History Of Index Funds
Despite their popularity, indexed funds are a relatively new variety of investments. University of Chicago students Edward Renshaw and Paul Feldstein proposed a theoretical model for an investment company in a 1960 paper.
Walton D. Dutcher Jr. and Richard A. Beach registered the first known index fund, the Qualidex Fund Inc, with the Securities and Exchange Commission in 1970. Qualidex, which tracked the Dow Jones Industrial Average, became active on July 31, 1972.
In 1975, the man who popularized index funds, John Bogle, entered the business. Bogle started the First Index Investment Trust, the predecessor to todays Vanguard Index 500 Fund . The First Index was one of the earliest S& P 500 funds.
The First Index Investment Trust received no love from the investment industry. Analysts and brokers mocked the First Index as Bogles Folly and even labeled it un-American. Bogle, however, had the last laugh.
Bogles Folly is going strong 45 years after its birth. The Vanguard S& P 500 had total net assets of $720.2 billion on October 15, 2021.
The size of the index fund market is huge index funds held $11 trillion in assets in April 2021, nearly 30% of the market capitalization of the S& P 500, valued at $36.54 trillion.
Index funds are the biggest single stockholders in 90% of the companies in the S& P 500. Index funds comprised 20% to 30% of the US equities market in 2018, Harvard Law School Professor John C. Coats estimates.*
Taxes Eat Into Cpp And Oas Income
According to WealthSimple, CPP pays $689 on average. OAS pays a flat $635 . So, if your CPP is average, and your OAS isnt clawed back, you should get about $1,324 per month.
Sounds like a decent amount, right?
Not really.
The thing is that CPP and OAS are both fully taxable. CPP is taxed at your marginal tax rate. OAS is also taxed at your marginal rate PLUS has the recovery tax on top of that. If you earn $126,000, your OAS gets clawed all the way back to zero! Of course, if youre earning that much money, then you dont need to worry about CPP and OAS amounts: youre doing fine. But if youre a Canadian relying on just CPP and OAS, then the potential taxes could hit you in the pocketbook.
If you make $1,324 every month, that works out to $15,888 per year. In Ontario, youd pay $1,132 in total taxes on that. So, really, you only get $1,229 per month. Thats a bit of a problem, because the average Toronto apartment now costs over $2,000. Even if you own a home, theres always property taxes and utilities to watch out for. And, of course, groceries, internet, cell phones, etc., all cost quite a bit of money when you put them all together.
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What Is A Capital Gain Or Capital Loss
In simple terms, a capital gain is an increase in the value of an investment or real estate holding from the original purchase price. If the value of the asset increases, you have a capital gain and you need to pay tax on it. That might sound bad but trust us, making money on your investments is never a bad thing.
Capital gains can be realized or unrealized. A realized capital gain occurs when you sell the investment or real estate for more than you purchased it for. An unrealized capital gain occurs when your investments increase in value, but you havent sold them. The good news is you only pay tax on realized capital gains. In other words, until you lock in the gain by selling the investment, it’s only an increase on paper.
A capital loss occurs when the value of your investment or real estate holding decreases in value. If the current value of the investment or holding is less than the original purchase price, you have a capital loss. Capital losses can be used to offset capital gains and reduce the overall tax you will pay. You can carry capital losses back 3 years or forward into future years.
If you have investments in registered plans such as a Registered Retirement Savings Plan , Registered Retirement Plan or Registered Education Savings Plan , you dont have to worry about capital gains and losses because the investments are tax-sheltered. That means your investments can grow and you dont have to worry about changes in value until you withdraw the funds.
Some Things To Watch Out For
Before you use this strategy be sure to check to see if you have any capital gains distributions that may pay out on mutual funds that you own in taxable accounts.
Mutual funds distribute capital gains each fall, although some funds distribute these funds as late as mid-December. These are gains that can be triggered even if you have not personally sold any of the mutual fund shares.
Youll want to know what these gains are before you decide to intentionally realize additional gains. Otherwise, you could get thrown into a higher long-term capital gain tax bracket, which will be at least 15%, and end up paying tax on part of the gain.
Also, remember capital gains taxed in the 0% tax bracket are still income and will therefore increase your adjusted gross income, which could potentially increase your taxes in other areas. For example, it could result in reducing or disallowing the medical expense deduction if you itemize or trigger the taxation of otherwise non-taxable Social Security benefits.
So, while you have to do your homework to avoid some of these tax landmines, the fact remains that strategically harvesting gains in low-income tax years, may reduce your future tax liability and put more income in your pocket.
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Use Capital Losses To Offset Gains
If you experience an investment loss, you can take advantage of it by decreasing the tax on your gains on other investments. Say you own two stocks, one of which is worth 10% more than you paid for it, while the other is worth 5% less. If you sold both stocks, the loss on the one would reduce the capital gains tax you’d owe on the other. Obviously, in an ideal situation, all of your investments would appreciate, but losses do happen, and this is one way to get some benefit from them.
If you have a capital loss that’s greater than your capital gain, you can use up to $3,000 of it to offset ordinary income for the year. After that, you can carry over the loss to future tax years until it is exhausted.
Hold Onto It Until You Die
This might sound morbid, but if you hold your stocks until your death, you will never have to pay any capital gains taxes during your lifetime. In some cases, your heirs may also be exempt from capital gains taxes due to the ability to claim a step-up in the cost basis of inherited stock.
The cost basis is the cost of the investment, including any commissions or transaction fees incurred. A step-up in basis means adjusting the cost basis to the current value of the investment as of the owners date of death. For investments that have appreciated in value, this can eliminate some or all of the capital gains taxes that would have been incurred based on the investments original cost basis. For highly appreciated stocks, this can eliminate capital gains should your heirs decide to sell the stocks, potentially saving them a lot in taxes.
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What Is The Capital Gains Tax Rate In Canada
Go rooting in the Income Tax Act and you’ll struggle to find something called capital gains tax. That’s because there’s no special tax relating to gains you make from investments and real estate holdings. Instead, you pay the income tax on part of the gain that you make.
In Canada, 50% of the value of any capital gains are taxable. Should you sell the investments at a higher price than you paid you’ll need to add 50% of the capital gain to your income. This means the amount of additional tax you actually pay will vary depending on how much you’re making and what other sources of income you have.
If you have both capital gains and capital losses, you can offset the capital gains with capital losses until you reach zero. If you only have capital losses, the CRA allows you to use the capital loss to offset a capital gain you originally declared in the previous 3 years, or you are allowed to carry forward the capital loss into the future. How far into the future, right now it’s indefinitely, so don’t lose the paperwork! That said, rules can change and so it’s best to check with your tax professional before taking any action.
Invest For The Long Term
If you manage to find great companies and hold their stock for the long term, you will pay the lowest rate of capital gains tax. Of course, this is easier said than done. A company’s fortunes can change over the years, and there are many reasons you might want or need to sell earlier than you originally anticipated.
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How To Keep More Of Your Passive Income
Individuals earning less than $39,375 in taxable income and married couples earning less than $78,750 could prioritize building up a long-term, diversified portfolio of dividend growth and high dividend yield stocks.
Wealthier families with adult children can lower their estate taxes, take advantage of the annual gift tax exclusion, and keep more investment income in the family through a relatively simple technique. Parents can give their adult children highly appreciated shares of dividend-paying stocks, passing along the cost basis and unrealized gain, but not triggering the deferred taxes.
The children aren’t as likely to be earning as high an income as the parentsespecially if they’re just starting their careersso unless they qualify for one of the child tax rules, the dividend income generated from the very same shares will be tax-free at the federal level. This can be huge if combined with liquidity discounts in a family limited partnership. The major downside from a tax perspective is the loss of the eventual stepped-up basis loophole .
Dividend Stock Investors: How To Avoid Taxes
Dividends stocks a perfect for a wide variety of investors, but taxes can put a big dent into your cash income. Heres how to avoid taxes altogether.
Dividend stocks are ideal for a wide variety of investors. If youre young, you can use the regular payments to buy even more stock. If youre retired, you can put the cash towards everyday expenses. Best of all, you can flip between strategies at any time. The choice is yours.
Yet theres one aspect to dividend stocks that remains challenging: extra taxes. Many investors are forced to pay nearly one-third of their dividend income to the government. Thats a big hit if youre relying on those dividends to support your lifestyle or save for the future.
What if I told you that you could avoid taxes on your dividends entirely? That could allow you to retire years in advance, or extend your current retirement years into the future.
There are a few ways to generate tax-free dividends. Choosing the strategy that is the right fit is up to you.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
Capital Gains Tax Basics
A capital gain occurs when the sales price you received for an asset is greater than your basis in that asset. The basis of an asset may be the price you paid for it. However, if youve made improvements to the asset, the cost of the improvements increases your basis. If youve depreciated the asset, that decreases your basis.
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How Investment Income Is Taxed
You need to include investment income in your tax return. This includes what you earn in:
- interest
- capital gains from property, shares and cryptocurrencies
You pay tax on investment income at your .
Use our income tax calculator to find out your marginal tax rate.
You’re allowed tax deductions for the cost of buying, managing and selling an investment. But there are rules around what you can and can’t claim as a tax deduction. See the Australian Taxation Office ‘s investment income deductions.
Investing and tax can be complex. See choosing an accountant for where to go for help.
Investing In Index Funds Is Easy
Index funds are popular because they are simple and easy to invest in. You can buy fractional shares of index exchange-traded funds through apps such as Robinhood, the Cash App, Interactive Brokers, Gemini, and WeBull for as little as 1¢.
A fractional share is a tiny percentage of a stock or ETF. For example, you could buy $5 worth of the SPDR S& P 500 ETF Trust . People who cannot afford to pay several hundred dollars for a SPY share can invest in SPY with fractional shares.
Anybody with the money can purchase index mutual funds from companies such as Vanguard and Fidelity. You can begin the purchase process by going to the companys websites.
Many organizations allow employees to purchase mutual funds and ETFs through 401k and other investment plans. The advantage of these tax-deferred investments is that they take the funds from your salary. Many organizations human resources departments make it easy to enroll in 401k plans.
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What Is The 2020 Short
You typically do not benefit from any special tax rate on short-term capital gains. Instead, these profits are usually taxed at the same rate as your ordinary income. This tax rate is based on your income and filing status. Other items to note about short-term capital gains:
- The holding period begins ticking from the day after you acquire the asset, up to and including the day you sell it.
- For 2020, ordinary tax rates range from 10% to 37%, depending on your income and filing status.
Carry Over Losses To The Next Year
Remember capital losses offset capital gains. If you have both capital gains and capital losses in the same tax year, you must use them to offset the capital gain. However, if you only have a capital loss, or you don’t have capital gains from the prior 3 years that you could amend and offset, you can carry those capital losses forward to offset future capital gains. You might need to consult a tax professional to follow the proper steps to do this.
Article Contents11 min read
This article is provided for informational purposes only. It does not cover every aspect of the topic it addresses. The content is not intended to be investment advice, tax, legal or any other kind of professional advice. Before taking any action based on this information you should consult a professional. This will ensure that your individual circumstances have been considered properly and that action is taken on the latest available information. We do not endorse any third parties referenced within the article. When you invest, your money is at risk and it is possible that you may lose some or all of your investment. Past performance is not a guarantee of future results. Historical returns, hypothetical returns, expected returns and images included in this content are for illustrative purposes only.
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