What is tax-deferring and how do billionaires benefit from it?
(NewsNation) — Most billionaires keep their wealth in company shares. When these shares increase in value, so does their net worth — but this increase isn't taxable until the shares are sold at a profit. Their solution? Simply never sell.
Instead of selling shares to access cash, billionaires often borrow against their existing assets to purchase more shares. This strategy increases their wealth without triggering taxable events.
Tax calculator: How much do I owe in taxes?
In 2007 and 2011, Amazon founder Jeff Bezos paid nothing in federal income taxes. Tesla CEO Elon Musk, the second-richest person globally, managed the same feat in 2018. Investor George Soros once went three consecutive years without paying federal income tax, Bezinga reported.
These examples show how billionaires employ sophisticated tax strategies that often leave them paying less than the average American worker.
The IRS launched a crackdown on the super-wealthy in early 2024, armed with billions in new funding from Congress. The initiative comes after a decade that saw audits of taxpayers earning over $1 million drop by more than 80%, despite this income bracket growing by 50%, CNBC reported.
How much do you need to earn to file taxes?
Tax deferral allows investors to delay paying taxes on investment gains until a later date. This strategy enables earnings to be reinvested and compounded over time, potentially offering stronger long-term growth than taxable accounts, per Ameritas.
The Rule of 72 shows this advantage: divide 72 by your rate of return to estimate how many years it will take to double money in a tax-deferred account.
For taxable accounts, the Rule of 96 applies, accounting for the drag of annual taxation.
What do you need to file your taxes?
Several investment vehicles offer tax-deferred benefits, according to Bankrate:
Traditional IRAs: Tax-advantaged retirement accounts where contributions may be tax-deductible and growth is tax-deferred until withdrawal
Employer-sponsored plans: 401(k)s and 403(b)s often include employer matching contributions
Fixed deferred annuities: Insurance-based contracts with guaranteed interest rates
Variable annuities: Tied to investments with potential for growth but subject to market risks
Government bonds: I Bonds and EE Bonds offer low-risk options with tax deferral benefits
Whole life insurance: Provides tax-free benefits for beneficiaries and cash-saving components
Consider this comparison: A single tax-deferred investment earning 8% annual interest over 30 years grows to more than $750,000. After paying 28% in taxes upon withdrawal, the investor receives approximately $560,000, per Ameritas.
7 key tax terms you should know
In contrast, a similar investment in a taxable account, with 28% paid in taxes annually, yields only about $400,000 over the same period — a difference of roughly $160,000.
Tax-deferred accounts come with significant restrictions, per Bankrate:
: 401(k) contributions are capped at $23,500 annually ($31,000 for those 50 and older), while IRAs are limited to $7,000 ($8,000 for those 50 and older)
Early withdrawal penalties: The IRS imposes a 10% penalty on funds withdrawn before age 59½, plus regular income tax on the amount
Required minimum distributions: Starting at age 73, account holders must begin taking distributions from retirement accounts or face substantial penalties
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