How the Rich Pay Surprisingly Few Taxes

How much did you pay Uncle Sam last year? Ever wonder how the 1% like Warren Buffet and Elon Musk pay so little in taxes compared to their wealth? You may be able to use some of their strategies yourself.

The White House reports that billionaires pay an average federal individual income tax rate of just 8.2%. It was a plea to working-class Americas to take notice that their tax rates aren’t fair in comparison. But if you’re a successful business owner, you may be scratching your head for a different reason. Whether you admit it or not, aren’t you curious about how these billionaires manage to hold onto so much of their wealth and if there are any ways you can, too?

The top marginal tax rate is currently 37% (and will stay that way for now, given the latest budget negotiations), so how do billionaires get away with paying a much lower rate? It mostly has to do with their income sources. The wealthier you are, the more likely you are to earn income from interest, dividends, capital gains, and rent from stock and property investments. This capital income often accounts for about one-third to one-half of a billionaire’s taxable “paycheck.”

Quite simply, they’re sitting on a pile of money that generates more money as it sits. And, thus, wealth begets wealth.

The tax rates on these capital income sources are far lower than ordinary income tax rates. Plus, there are ways to delay or avoid taxes on certain income sources like investment income. Wage workers, on the other hand, are taxed at the highest rate for their income bracket for every penny they make when they make it.

Ironically, Warren Buffet has been an outspoken critic of this system. He once voiced frustration after realizing he pays a lower tax rate on his income than his secretary. But even though he isn’t “happy” with the way things are, he’s smart enough to seize these opportunities presented by laws enacted by Congress and signed by the President. In fact, he reportedly pays the least taxes among the 25 richest people in America. How? By paying himself a modest low-six-figure salary at Berkshire Hathaway and keeping around 99% of his personal wealth as stock. Elon Musk has been rumored to follow a similar path—receiving no salary from Tesla, only stock options.

Most successful business owners fall somewhere between the tax-reducing power of billionaires versus wage earners. If you’re among them, there may be dozens of ways to reduce the ordinary income tax bill that comes with a salary. These could include:

  • Stock options: Stocks aren’t just for the big guys. Privately held small businesses may be able to offer stock options to employees and owners that usually aren’t taxed until the stocks are sold.
  • Divide and conquer: Separate a portion of taxable income into pre-taxed and tax-advantaged buckets. A few ways to do this would be to max out retirement plan and health savings account contributions and be generous with charitable giving.
  • Make your money work for you: You might talk to an adviser about investment opportunities that offer distributions like real estate investment trusts (REITs).
  • Take credit where it’s due: Your business buildings, vehicles, equipment, and even copyrights may be depreciable property that can be claimed to offset business income. Plenty of other business expenses can be claimed as well.
  • Adapt: There are several ways to defer income when it makes sense, harvest losses to offset gains, and balance business losses when your income is unpredictable from year to year.

What it comes down to is finding ways to generate income by working smarter (finding tax breaks and generating capital income) not harder (through wages). Your wealth can grow when you’re able to put your money to work, reinvest in your business and other businesses, and make tax-advantaged moves. Feel free to contact us with questions.

Photo from 123rf.com

Client Spotlight

A terrifying home invasion involving men with masks and guns set Pam Wood on an unexpected path to business ownership in 1981….
What happens when you combine a passion for creating, a knack for business, and deep family values? For Scott Klingler, owner of MergeWorks, it resulted…
Bessie M. Irizarry loves embracing a good challenge. It’s one of the many reasons she’s earned respect as a female engineer and business owner in…
San Antonio native Mark Lopez can’t recall a time he didn’t envision himself following the footsteps of his father, a project manager, into the construction…
Siew Pang knows that the key to unlocking the American dream can be discovered by embracing unexpected opportunities….
If you’re a San Antonian, you may not want to imagine your weekend without brunch at the city’s beloved Magnolia Pancake Haus….
Greg Thompson has long respected money and how it can catalyze greater things….
You may not be aware of it, but Don Lasseter has helped you throw a party. How do we know that? He’s the franchise owner…
Land surveyors aren’t known for exceptional customer service. But why shouldn’t they be? David Breaux set out in 1998 to prove that treating customers right…
When Lance Rose sees a business need, he fills it. That’s how he and Terri, his wife of 30 years, have evolved into the proud…
Matt and Lara Bruhn met while in graduate school at Harvard. He served as an officer and F-15C pilot with the U.S. Air Force….
Growing up in Piedras Negras, Coahuila, Mexico—just south of Texas along the Rio Grande—Oscar E. Flores dreamed of becoming a designer….

Blogs and Articles

Digital Assets and Your Taxes

You may have reveled in the Wild West days of cryptocurrency and other digital assets, but we’re entering an era of meticulous record keeping and...

Digital Assets and Your Taxes

Read More

The Goldilocks Rule for Tax Withholding

If you’re like half of Americans this year, you are more dependent on your tax refund to pay for necessities than you have been in...

The Goldilocks Rule for Tax Withholding

Read More

How Inherited Assets Affect Your Taxes

Inheriting assets can be a financial blessing, but it also raises essential tax questions that many heirs overlook. How you manage those assets can have...

How Inherited Assets Affect Your Taxes

Read More

Getting Hit by Someone Else’s Bankruptcy

Finding out that another business or individual who owes your business money has declared bankruptcy can feel like a kick to the stomach....

Getting Hit by Someone Else’s Bankruptcy

Read More

Welcome to Texas: Cutting Tax Ties with Your Previous State

San Antonio is currently one of the fastest-growing metro areas in the nation. If you’re among our new residents, welcome! Before you enjoy the tax-friendly...

Welcome to Texas: Cutting Tax Ties with Your Previous State

Read More

Reaching the Unreachable IRS

Reaching the IRS has always been challenging. With the IRS workforce reduction continuing, many believe your odds of reaching a warm body to resolve a...

Reaching the Unreachable IRS

Read More

How Is Costco Gold Taxed?

Gold, silver, and other precious metals have emerged as standout assets in today’s unpredictable economy due to their ability to remain somewhat independent from stock...

How Is Costco Gold Taxed?

Read More

Yes, You Do Still Have to File Taxes

Early filing numbers are measurably down this year, data security concerns are high, and IRS staffing is in disarray. But if you’re considering scrapping it...

Yes, You Do Still Have to File Taxes

Read More

Retirement Plan Perks for Texas Small Businesses

Retirement Plan Perks for Texas Small Businesses

Read More

Top 6 Worst Social Media Tax Tips

Top 6 Worst Social Media Tax Tips

Read More

What’s Happening with the Corporate Transparency Act?

In March 2025, the Financial Crimes Enforcement Network (FinCEN) issued an interim final rule removing the requirement for U.S. companies to report beneficial ownership information...

What’s Happening with the Corporate Transparency Act?

Read More

Love & Marriage & Your Business Assets

Love & Marriage & Your Business Assets

Read More

How Small Business Owners Reduce Taxable Income

How Small Business Owners Reduce Taxable Income

Read More

Spot These Tax Scam Signs Before It’s Too Late

Spot These Tax Scam Signs Before It’s Too Late

Read More

‘Bitcoin Jesus’ Faces Tax Fraud Reckoning

‘Bitcoin Jesus’ Faces Tax Fraud Reckoning

Read More

Now Accepting New Clients

Let’s Start the Conversation

Let’s take a look at your finances together. We offer a complimentary 1-hour call to review your past tax returns. If we see a way to help you, we will.