How to Avoid Taxes Legally: What Billionaires Know
In 2007, Jeff Bezos paid $0 in federal income taxes. He did it again in 2011. Donald Trump paid just $750 in 2016, and Warren Buffett famously acknowledged that he paid a lower tax rate than people working in his office.
How can some of the wealthiest people in America pay so little in taxes while ordinary Americans see money disappear from every paycheck?
The answer might surprise you.
Billionaires don’t necessarily follow a different set of tax rules. They simply earn their money differently and use the tax code to their advantage.
Some years, the ultra-wealthy pay billions in taxes. Other years, they pay almost nothing. Much of that difference comes down to when they recognize income, how they structure their investments, and which assets they choose to sell.
The good news? You don’t need a billion-dollar portfolio to benefit from some of the same strategies.
Understanding how to avoid taxes legally can help you make smarter investment decisions, keep more of your retirement savings, and potentially reduce the taxes your heirs will owe.
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Do Billionaires Actually Pay Taxes?
Yes, and sometimes they pay enormous amounts.
In 2021, Elon Musk reported paying more than $11 billion in taxes after exercising Tesla stock options and selling shares. The top 1% of taxpayers also account for a substantial portion of federal income taxes.
But those numbers don’t tell the whole story.
A 2021 ProPublica investigation found that America’s 25 wealthiest individuals increased their collective wealth by approximately $400 billion between 2014 and 2018 while paying federal income taxes equal to roughly 3.5% of that wealth growth.
That comparison comes with an important distinction: An increase in wealth isn’t the same thing as taxable income.
If your house gains $50,000 in value this year, the IRS generally doesn’t charge you federal income tax on that appreciation. The same principle applies when a billionaire’s stock portfolio increases by millions or billions of dollars.
The difference is that wealthy investors often have more control over when they turn those gains into taxable income.
Here’s how they use that advantage.
1. They Build Wealth Through Investments Instead of Paychecks
Most Americans earn their living through wages. Their employers withhold taxes before the money even reaches their bank accounts.
Billionaires often take a different approach.
Jeff Bezos has historically earned an annual Amazon salary of $81,840. Warren Buffett has collected a $100,000 salary from Berkshire Hathaway for decades, while Mark Zuckerberg famously took a $1 salary from Meta.
Those relatively modest paychecks represent only a tiny fraction of their wealth.
Instead, most of their fortunes come from ownership in businesses and investments.
Here’s why that distinction matters.
When you earn a paycheck, the IRS generally taxes that income in the year you earn it. When your stock increases in value, you generally don’t owe capital gains taxes until you sell.
Consider two people:
- Person A earns $200,000 annually through a salary and generally owes income taxes on those earnings each year.
- Person B owns investments that appreciate by $200,000 but doesn’t sell anything. That appreciation generally creates no current capital gains tax.
Both individuals experienced a $200,000 increase in their financial position, but the tax consequences look very different.
How You Can Use This Strategy
You don’t need to own Amazon stock or run a multibillion-dollar corporation to benefit from tax-deferred investment growth.
A traditional taxable brokerage account gives you some control over when you realize capital gains.
For example, you might hold appreciated investments during your highest-earning years and strategically sell portions after retirement, when your taxable income could be lower.
The takeaway: Building wealth through investments can create more flexibility over when you pay taxes than relying entirely on earned income.
2. They Take Advantage of Lower Capital Gains Tax Rates
The tax code generally treats long-term investment gains more favorably than ordinary income.
When you sell an investment you’ve held for more than one year, you may qualify for long-term capital gains tax rates of 0%, 15%, or 20%, depending on your taxable income. Higher earners may also owe the 3.8% net investment income tax.
Compare that with ordinary federal income tax rates, which can reach 37%.
This difference helps explain why wealthy investors often prefer investment gains over traditional wages.
However, there’s another opportunity that many investors overlook.
How You Can Use This Strategy
You may qualify for a 0% federal long-term capital gains tax rate during years when your taxable income falls within the applicable threshold.
The years between retirement and the start of Social Security benefits can create a particularly valuable opportunity.
Imagine retiring at 60 with a substantial taxable investment portfolio. Without employment income, you may have room to sell appreciated investments while remaining in a lower capital gains tax bracket.
Strategically realizing gains during these years could reduce your lifetime tax burden.
Keep in mind that capital gains count toward taxable income, annual thresholds change, and state taxes may still apply.
The takeaway: The year you sell an investment can matter almost as much as how much money you make from it.
3. They Borrow Against Their Investments Instead of Selling
How do billionaires pay their living expenses when so much of their wealth remains tied up in stocks?
Sometimes, they borrow against those assets.
This strategy forms part of an approach commonly called “buy, borrow, die.”
Here’s how it works:
- Buy assets that have the potential to appreciate.
- Borrow against those assets instead of selling them.
- Hold the investments until death, when inheritance rules may eliminate certain unrealized capital gains.
Because the IRS generally doesn’t consider loan proceeds taxable income, investors can access cash without immediately triggering capital gains taxes.
Oracle co-founder Larry Ellison provides a well-known example. In 2014, Oracle disclosed that he had pledged approximately 250 million company shares, worth around $10 billion at the time, as collateral for personal borrowing arrangements.
Rather than selling shares to generate cash, he could borrow against their value.
How You Can Use This Strategy
Some financial institutions offer securities-backed lines of credit that let eligible investors borrow against taxable investment portfolios.
Home equity lines of credit offer another way to access funds without selling appreciated assets.
However, borrowing introduces significant risks.
Interest costs can increase, investment values can decline, and lenders may demand additional collateral or force asset sales when markets fall.
For most retirees, borrowing against investments should never serve as an automatic replacement for a thoughtful withdrawal strategy.
The takeaway: Borrowing may defer taxes, but the interest costs and financial risks can outweigh the potential benefits.
4. They Use the Step-Up in Basis to Reduce Taxes for Their Heirs
This may be one of the most valuable tax strategies available to families with appreciated investments.
The IRS generally allows inherited capital assets to receive a new cost basis equal to their fair market value at the owner’s death.
Financial professionals call this a step-up in basis.
Consider an example.
Your father purchased stock for $10,000 many years ago. By the time he passes away, those shares have grown to $1 million.
If he sold the stock during his lifetime, he could owe capital gains taxes on approximately $990,000 in appreciation.
But if you inherit those shares, your cost basis generally resets to their $1 million value at his death.
If you immediately sell the investment for $1 million, you generally owe no federal capital gains taxes on the appreciation that occurred during his lifetime.
That’s a significant difference.
The step-up in basis can also apply to inherited real estate and other qualifying assets. Estate taxes and special basis rules may still affect particular situations.
How You Can Use This Strategy
Your retirement withdrawal strategy shouldn’t focus exclusively on minimizing this year’s tax bill.
The accounts you spend first and the investments you leave behind can influence the total taxes your family pays over multiple generations.
For example, traditional IRAs generally don’t receive the same step-up in basis as taxable brokerage investments.
That distinction can make a meaningful difference when deciding which assets to spend during retirement and which to preserve for heirs.
The takeaway: Smart estate planning considers the taxes your family may face after you’re gone, not just the taxes you owe today.
5. They Donate Appreciated Investments Instead of Cash
Warren Buffett has pledged to give away more than 99% of his wealth, and much of his charitable giving involves Berkshire Hathaway stock.
Donating appreciated investments can offer meaningful tax advantages compared with selling those assets and donating the proceeds.
Here’s why.
Suppose you purchased stock for $10,000 and it eventually grew to $100,000.
If you sell the investment, you may owe capital gains taxes on the $90,000 gain.
Instead, you could donate the shares directly to a qualified public charity.
When you donate eligible stock you’ve held for more than a year:
- You generally avoid recognizing the capital gain.
- You may qualify for a charitable income tax deduction based on the stock’s fair market value.
- The charity receives the investment’s full value without you first selling the shares.
The deduction depends on several factors, including whether you itemize, your adjusted gross income, the type of charity, and applicable tax limits.
How You Can Use This Strategy
If you regularly donate to your church, nonprofit organizations, or other charitable causes, consider giving appreciated investments instead of writing a check.
This strategy can become especially valuable after years of investment growth.
A donor-advised fund may also help you organize charitable contributions and decide when to recommend grants to qualifying organizations.
The takeaway: Changing what you donate, rather than how much you donate, can potentially improve the tax efficiency of your charitable giving.
6. They Use Investment and Business Losses to Offset Taxable Gains
Not every billionaire tax strategy involves investment growth. Sometimes, substantial losses help wealthy taxpayers reduce their tax bills.
Donald Trump’s historical business losses offer one of the most recognizable examples.
According to reporting based on tax records, his businesses lost more than $1 billion between 1985 and 1994.
Certain qualifying business losses can offset taxable income, subject to applicable limitations. Tax rules may also allow taxpayers to carry eligible losses into future years.
These provisions help explain how someone can report little taxable income despite owning substantial assets.
Of course, many business losses represent genuine economic losses. A tax deduction doesn’t make a losing investment profitable.
How You Can Use This Strategy
Individual investors can use a related technique called tax-loss harvesting.
Imagine you sold an investment and realized a $20,000 capital gain.
You also own another investment that’s declined $8,000 in value.
By selling the losing investment, you could potentially use that $8,000 loss to offset part of your taxable gain.
You would then have $12,000 in net capital gains instead of $20,000, assuming no other gains or losses.
If your capital losses exceed your capital gains, federal tax rules generally let individuals deduct up to $3,000 of the remaining losses against ordinary income each year. You can carry additional unused losses forward.
Be mindful of the wash-sale rule. Buying substantially identical securities within the restricted period around a loss sale can prevent you from immediately deducting that loss.
The takeaway: Market downturns can create opportunities to manage your tax liability, even though investment losses never represent a desirable outcome on their own.
The Retirement Tax Strategy Billionaires Don’t Have a Monopoly On
One of the biggest lessons from the ultra-wealthy involves controlling when you recognize taxable income.
That principle matters even more when you approach retirement. During your working years, your salary often determines much of your annual taxable income.
Retirement introduces more flexibility.
You may have several potential income sources, including taxable brokerage accounts, traditional IRAs, Roth IRAs, pensions, and Social Security.
Each source receives different tax treatment.
Choosing when and where to withdraw money can make a meaningful difference in how much you ultimately keep.
For example, the years after you stop working but before you begin collecting Social Security or taking required minimum distributions may offer opportunities to:
- Realize long-term capital gains at favorable tax rates.
- Convert portions of traditional retirement accounts to Roth IRAs.
- Harvest investment losses to offset taxable gains.
- Make tax-efficient charitable contributions.
- Coordinate withdrawals to manage your lifetime tax liability.
Roth conversions deserve particular attention because they allow you to move money from traditional retirement accounts into Roth accounts while paying taxes on the converted amount.
Converting during lower-income years may help reduce future required minimum distributions and create more tax-free retirement income.
The best approach depends on your overall financial situation, current tax brackets, future income expectations, and estate planning goals.
Is Avoiding Taxes Legally the Same as Tax Evasion?
Absolutely not.
Tax avoidance and tax evasion have very different meanings.
- Tax avoidance involves using legal provisions of the tax code to reduce, defer, or eliminate taxes you would otherwise owe.
- Tax evasion involves intentionally breaking tax laws, such as hiding taxable income, falsifying deductions, or misrepresenting financial information.
The strategies discussed here generally operate within established tax rules when taxpayers follow the applicable requirements.
Debates about whether wealthy Americans should pay more taxes are separate from understanding how the current tax system works.
And that distinction matters.
You don’t have to agree with every provision in the tax code to understand how it affects your financial decisions.
You Don’t Need to Be a Billionaire to Make Smarter Tax Decisions
Billionaires may have access to financial resources and sophisticated planning opportunities that most Americans will never need.
But many of the principles behind their tax strategies apply to ordinary investors, too.
The biggest difference often comes down to planning.
Most Americans receive a paycheck and pay taxes as they earn money. Wealthy investors frequently have greater flexibility over when to recognize gains, sell investments, make charitable contributions, or transfer assets.
Once you’ve accumulated investments and retirement savings, some of that flexibility becomes available to you.
The goal isn’t necessarily to pay the least amount of taxes this year. It’s to make decisions that could reduce your total tax burden over your lifetime.
That means thinking beyond April 15 and considering how today’s decisions affect your future income, retirement lifestyle, and the wealth you eventually pass to your family.
At Bonfire Financial, we believe tax planning should work alongside your investments, retirement income strategy, and estate plan. Because growing your wealth is only part of the equation. Keeping more of what you’ve built matters, too.
Want to know whether you’re overlooking opportunities to reduce your retirement taxes? Schedule a conversation with us to explore how a coordinated financial plan could help you make more informed decisions.
