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“Tax the rich” is a popular slogan, but changing tax laws relies on the power of others. While you wait, experts recommend getting hands-on with the tax code and paying your taxes like a rich person instead.
Putting aside questions about who contributes the most to U.S. tax revenue (according to the Tax Foundation think tank, the top 1% of taxpayers paid more in income taxes in 2022 than the bottom 90% combined), some previously leaked tax returns and conversations with tax experts could provide insight into how ultra-wealthy Americans protect, transfer, and grow their wealth.
Some tactics are probably out of reach for most people, while others are simple enough to use with enough planning.
How to avoid taxes and grow wealth with a Roth IRA
Billionaire Peter Thiel famously contributed $2,000 to a Roth IRA in 1999 and used $1,700 of that to buy 1.7 million founder shares of PayPal stock. Within 20 years, his investments, including eBay’s acquisition of PayPal and his personal investment in Facebook, all made safely within the confines of a Roth IRA, have grown to $5 billion, all of which can be withdrawn tax-free when he turns 59 1/2.
Roth IRA contributions are made with after-tax dollars and can be withdrawn tax-free after investing for at least five years at age 59 1/2 or older. In contrast, traditional IRAs are funded with pre-tax dollars for upfront benefits and taxable withdrawals.
It’s unlikely that the average person will be able to find a profitable personal investment like Thiel, but even if you earn more than the established limits, you can still use a Roth IRA.
In 2025, you will be able to contribute up to $7,000 ($8,000 if you are 50 or older) to a Roth IRA as long as your modified adjusted gross income is less than $150,000 for single filers or $236,000 for married filers filing jointly. Contributions are phased out to a maximum of $165,000 for single filers and $246,000 for joint filers.
To get around these restrictions, use a so-called backdoor Roth IRA. Here’s how:
- Use pre-tax money to contribute to a traditional IRA
- Transfer that money to your Roth IRA
- pay taxes. If you received a tax benefit when you contributed to a traditional IRA, you’ll need to report it as income and return it at tax time, as well as any gains you make on that money.
There’s still time to use this trick, as 2025 retirement contributions can be made by the April 15 tax deadline.
How to use losses to lower taxes
Billionaires like Amazon.com founder Jeff Bezos and Trump like to lose money because it reduces their tax burden. You can also use them on a smaller scale. Given last year’s crypto crash, this tax season might be a good time to familiarize yourself with this tactic.
If you sell investments like Bitcoin at a loss when digital assets crash in late 2025, you can use up to $3,000 a year to offset your ordinary income on federal income taxes and carry the rest forward. If you’re married and file separately, you can deduct half of that amount each year.
Unused losses can be carried forward indefinitely.
Hint: When looking for tax losses, focus on short-term losses first, because short-term and long-term losses should be used first to offset gains of the same type. According to Fidelity, these are first used to offset short-term gains, which provide the greatest benefit since they are subject to higher marginal tax rates.
caveat: The wash sale rule states that if you sell an investment at a loss and then purchase an identical or substantially identical security within 30 days before or after the sale, you will not receive tax benefits. Therefore, make sure that the investment is either no longer needed or can be easily replaced by another investment that plays a similar role in your portfolio.
Note: Cryptocurrencies and other digital assets are exempt from wash sale rules.
“Cryptocurrencies are defined and regulated as property, not securities,” said Rob Barnett, investment advisory principal and professional tax attorney at Outlook Financial Center. “If you still want to own your cryptocurrencies or take advantage of the tax benefits, you can sell or buy your cryptocurrencies instantly at a lower price.”
timing is everything
Barnett said timing large transactions can also save money. If you want to withdraw funds from your IRA for a large purchase, see if you can split the withdrawal over two calendar years.
For example, you need $300,000 to buy real estate and build a house. The land must be purchased within the next 30 days, but construction will not begin for six months, or until the next calendar year. Consider withdrawing $150,000 to purchase land. If so, wait to withdraw your next $150,000 next year.
IRA withdrawals are taxed as ordinary income for the year, so “you’re splitting your income between two tax returns,” Barnett says. “You’ll save $38,000 in taxes, plus $150,000 in benefits that weren’t immediately withdrawn.”
“Always consider the tax implications and remember it’s not about what you make, it’s about what you keep,” he said.
hire a child
If you run a business, hire kids.
You can hire them and pay them a high salary. Experts say their salaries will be deducted as business expenses and the money will be given to relatives.
If the child is a minor, there are even more tax benefits.
According to Mercer wealth advisor David Steuring, if your child:
- Under 18: Wages are exempt from Social Security and Medicare taxes
- Under 21 years old: Wages are exempt from federal unemployment tax
“Your child also pays no Social Security or Medicare taxes on that wage,” he wrote on his blog. “As a result, compensation paid to minor children is completely free of federal payroll taxes. Additionally, wages are fully deductible as a business expense, reducing both income and self-employment tax liability.”
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
