The world of finance is now full of illegal trading and sharing of information between the wealthy. It is not good to be rich! Rich people feel the burden of taxes. But they know some legal or quasi-legal tricks to give the taxman the smallest amount. Most of the tricks are legally shady and out of reach to the common people.
Some Common Methods to Plan Income Tax Liability
Life insurance borrowing:
This is actually borrowing an asset in the form of Life Insurance. Anyone with a high income can use this trick to reduce the amount of annual taxes. Such individual can choose a policy with a large cash dividend. Once you chose the policy, for example, one million dollars, most of the banks will allow you to borrow anywhere up to 90 percent of the total surrender value of the policy. The amount you get is shown as a loan and as it is not income so it isn’t subjected to income tax or capital tax. But it is linked to different risks, so consult a professional before you jump into this tactic.
Tax heavens (Sending the money overseas):
Rich people rely on the process to shelter their money by establishing “tax homes”. This trick works on a simple idea that if you have to pay high taxes in one location then send your money to such overseas locations that charge no income taxes. The Cayman Island is such an example where almost 68,000 companies are registered to avoid taxation. But if you are not in top income bracket then this strategy is not for you.
Individual retirement accounts (IRAs):
Individual retirement account gives you the facility to put money aside for your life after retirement. Once you have retired you are automatically in a lower tax bracket. You also have the opportunity to defer paying tax until you begin making withdrawals. That means you are benefiting by lower taxation margins.
Trust funds:
This scheme offers you the opportunity to pay only 1% tax per annum. Shifting your assets into a grantor retained annuity trust (GRAT) is a legal way to avoid estate tax and probate. Rich people pay money into a trust as donation. Then the fund offers cheap loans to their members which they “forget” to pay back. In this way, the members can dodge income tax by showing their salaries as loans. It is so called a legal process but yet looks like the shadiest trick.
Payments in kind:- Pay in Kind to employees/ Senior executives as paying their personal trips abroad or Hotel Stay Expenses as Official expenses
This old tax loophole fortunately been obsolete by strict regulation. In the old days, executives received their payment in kind like gold or rare silk instead of cash. These kinds then sold for extra commodities that were used by those executives. It was a common rule to dodge tax in former days.
Equity swaps:
It is basically an official agreement to exchange gain and loss of two parties without exchanging ownership. This value transfer process allows the parties to avoid high taxes and transaction cost.
Everyone knows of one fact and that is the amount of money that is not taxed is not your income but a form of a loan. But you can gain more money only when you have money so most of the tricks are valid only for the rich people.