would you believe me if I told you that Warren Buffett pays less tax than his secretary you may wonder how a billionaire pays fewer taxes than an average income earning secretary and the answer is that there are two kinds of taxpayers those who accept taxes as a natural part of life and pay whatever the government tells them to and there were others who do everything in their power to avoid paying taxes let's give each of these types of people a name we will call the willful taxpayer Paul and the tax avoider Jack - Paul when the government comes knocking at the end of the year he doesn't see it as a big deal earning $40,000 a year Paul hands over his $15,000 worth of income taxes and moves on about his life sure he would love to keep more of the $15,000 but he sees paying taxes as a normal part of life jack on the other hand is a medium-sized business owner who draws himself a salary from the tech company he owns and built from scratch jack has over 50 employees working for him and has seen his business grow year-over-year unlike Paul Jack despises tax he thinks to himself how can the government who played no part in making his business's success take such a huge chunk of his money for nothing to make matters worse being taxed personally and by being a business owner jack is subject to just about every tax imaginable such as personal income tax sales tax excise tax property tax and investment tax with all these potential taxes being applied to his income Jack decided to look into how big corporations avoid paying taxes after hearing that in 2018 Amazon paid zero income tax even though they earned over two hundred billion dollars in revenues that year determined to avoid losing a sizeable chunk of his earnings to tax Jack looked into ways he could cut down on the amount of corporate tax his business pays and reduce his own personal tax bill in his hunt for tax strategies Jack came across the following techniques method number one riding off expenses given that most rich individuals earn their fortunes through a business this gives them the opportunity to write off expenses and their taxable income you see most expenses you occur in your day-to-day business operations can be written off against your income to lower your taxes payable for example let's say you run a digital marketing agency and are in $200,000 a year in revenues if you had no expenses then the whole $200,000 would be subject to tax however as most businesses incur expenses these costs will reduce what amount of profits will be subject to tax for instance if you have $100,000 worth of legitimate business expenses a year then this would make your annual profit $100,000 instead of the $200,000 you earned in revenue which would cut your taxes paid on your earnings by more than half eligible expenses can include things like business meals office supplies new laptops internet connections etc employee benefits staff training rent and leases car expenses etc as the owner of the business if you decide to take a trip for a conference to develop your skills in digital marketing you can decide to write that off as well again this method of reducing your taxes is only enjoyed by people who own businesses leaving little wonder as to why most people who own businesses seem to be considerably richer than people who work as employees method number two diverting income as of 2017 the United States corporate income tax rate was reduced from thirty five percent to twenty one percent and while this offered many companies Amazon included the opportunity to significantly reduce their income tax payable many companies still elect to recognize their income in countries with even lower tax rates for instance the Cayman Islands has no income tax no corporate tax no estate or inheritance tax and no gift tax or capital gains tax making it a pure tax haven in short whatever you earn you keep of course without any calculations it is obvious that this is the significant savings to any business who can realize their income overseas but just how much would this save you if you had set up a tax haven in this country let's say your business earned five million dollars last year instead of paying an income tax of thirty five percent for 1,750,000 dollars you would instead pay nothing and keep that almost two million dollars for yourself besides allowing you to realize income tax free the Kane have very strict banking laws designed to protect banking privacy the country does not have any tax treaties with other nations thus guarding the finances of its offshore banking clients from the tax authorities of other countries moreover offshore corporations in the Caymans are not required to submit financial reports to any Caymans government authority an incorporation in the Caymans is a very simple streamlined process with all these benefits it's no wonder companies are flocking to these remote destinations to hide their earnings method number three netting revenues against losses if you've ever looked at the stats in favor of starting a business then you will know just how bleak they can be the numbers show that 20% of small businesses fail in their first year 30% of small businesses fail in their second year and 50% of small businesses fail after five years in business finally 70% of small business owners fail in their tenth year in business with the chance of success in business being rather low there are still numerous companies that succeed and make a fortune for which they need to protect and one of the ways they do this is through the use of loss carryforwards you see most businesses require a few years in operation before they start turning a profit and in the years where business is not exactly booming losses are bound to be incurred these losses while unfortunate at the time are excellent tax avoidance tools for future periods you see like expenses loss carryforwards can be netted against your earnings to reduce your overall taxes payable meaning that less of your income is subject to tax method number for issuing stock options another way businesses reduce their taxes is by issuing stock options to its stake holders this method is particularly convenient for businesses for two reasons number one it is booked is an expense which will reduce profits and ultimately the amount of money that is subject to tax and number two it does not result in a cash outflow for the business you see when stocks are issued they are booked as an expense for accounting purposes but no cash changes hands this means that the company can reduce its profits through the expense and maintain a strong cash position moreover companies that use this strategy gain the benefits realized by incentivizing their shareholders to further increase the stock price if you own stock in the company you worked for wouldn't you put an extra effort in order to make the company's stock value rise so that you could cash out your options for more money with these four corporate tax strategies in mind jack is starting to feel more confident that he can reduce or eliminate his corporate tax bill but he knows that he needs to withdraw some income from his business in order to live and once that cash to be minimally taxed so he decides to switch gears and look into ways he can reduce his personal tax owing method number five leveraging geographical tax laws for the past 20 years jack has grown his business in the heart of Silicon Valley however his patience with living in the state with the highest income tax rate in the United States has finally reached a tipping point with the state income tax rate of 13.3% for the highest income earners Jack is seeing a large chunk of his income being handed over to his state government with even more being passed along at the federal level while federal taxes can't be avoided Jack wonders what he can do to avoid some of the other taxes he is being subject to that are eroding his personal wealth Jack began researching other states with lower income tax rates and was surprised to see that 7 states were income tax free such as Texas Nevada and Florida meaning that he could save the 13.3% tax he was currently paying and still enjoy the warmth of the Sun all year long as Jack began looking into housing options in each of these three states he wondered if there were other ways he could further reduce his personal tax bill method number 6 investing in real estate part of the reason the rich continue to get richer is that they make their money work for them and one of the ways they do this is through real estate you see not only does owning real estate increase your wealth by generating income but it also allows for the reduction in taxes payable when you buy a property you are requiring a depreciable asset and because the asset reduces in value over time from an accounting perspective you are able to deduct depreciation and reduce the amount of income that is subject to tax common deductible expenses include repairs to the property and mortgage interest and the more money you spend on expenses the more you can reduce your tax selling however once a property is fully depreciated what do you do you sell that property and buy a new one while selling property usually triggers tax there is such a thing as a 1031 exchange which allows you to defer the tax you paid on selling the property if you buy a new property within 60 days of sale in essence you can continue to depreciate your properties and then sell them in perpetuity and never pay the tax while still being able to use the assets to generate rental income method number seven deferring income while Jack has looked into moving states and using real estate to reduce his taxable income he still feels as though some of his income will need to be sheltered for tax and another way he can do this is by deferring his income the most common tax deferral vehicle is an individual retirement account or an IRA which allows you to move your income into a fund and subject your earnings to tax at a later date if you're an employee you probably use this type of account to hold your savings and allow them to grow over time however they also double as a solid tax avoidance strategy you see income earned from employment is subject to tax unless that is you contribute the funds to your IRA account in the year you contribute money into your IRA you will receive a deduction from your taxable income or the amount you contributed this strategy is particularly effective for high-income earners because it reduces their tax bill during their highest earning years for instance if you earn five hundred thousand dollars a year and are in the highest tax bracket your income is probably being subjected to tax of up to 40% but what if you could avoid the 40% tax and instead have part of your income only be taxed to 20% well you can do just that using an IRA you see when you contribute to your IRA you do not pay any tax in the year you contribute and instead pay tax when you withdraw all the funds which is typically during retirement however during retirement you'll probably be earning much less than $500,000 meaning that the money you withdraw will be taxed at a lower rate and the difference in tax rates is how much you would have saved by using this income deferral technique with all these tax avoidance techniques in your financial toolbox you only have one question left to answer which type of tax payer will you be from here on out a Paul or a jack thanks for watching