7 strategies rich people use to pay less tax

Everyone wants to pay less in taxes — including the rich.

Steven M. Piascik, CPA, MT, founder and president of boutique CPA firm PIASCIK, says that the best way to minimise taxes is something anyone can do, no matter their net worth. “Tax minimization means documenting all your expenses that can be classified into deductible categories,” he explains. “Everyone asks, ‘How do you save? You document, document, document.'”

This is much easier when you employ the services of a qualified CPA, who keeps up with changes in the tax code and knows which might apply to you. “A lot of the responsibility falls on the behalf of the CPA,” says Piascik, who specialises in tax minimization and complex tax strategies for high net worth individuals and corporations.

Below, he outlines seven strategies the accountants of high net-worth individuals use to minimise tax bills — some common, some less so.

Be aware that not every strategy listed below works for everyone, and that it’s smart to consult a professional to find out which might work for you, and how.

They max out retirement accounts.

One of the most common tax-minimization strategies high net worth people use is one to which people of all income levels have access: contributing the maximum amount to their retirement accounts.

In fact, it's so simple that Piascik says people miss it all the time. 'Why aren't high net worth individuals maxing out a 401(k) from their employer? If they're self-employed, does the situation leave them open to defined benefit or defined contribution plans? Both are qualified retirement plans.'

With qualified retirement plans come tax benefits. Plans like the employer-sponsored 401(k) (limit $18,000 for 2015/2016) are funded with 'pre-tax' dollars that decrease your taxable income. Contributions to plans like the SEP IRA -- for self-employed workers and small business owners, limit $53,000 or 25% of compensation -- and the traditional IRA, limit $5,500, are tax-deductible.

The more you can save for retirement in qualified retirement plans, the bigger tax benefit you'll see.

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They use cost segregation studies to accelerate depreciation on assets.

On the IRS website, depreciation is explained as following:

Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.

Most types of tangible property (except, land), such as buildings, machinery, vehicles, furniture, and equipment are depreciable. Likewise, certain intangible property, such as patents, copyrights, and computer software is depreciable.

To determine, and accelerate, depreciation so taxpayers can get the deductions today instead of 20 years down the road, taxpayers can undergo what's called a 'cost segregation study,' which divides assets into their respective categories and assigns the appropriate deductions.

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They take advantage of major tax deductions for their businesses.

According to the Rich Habits Institute, 85%-88% of American millionaires are self-made. One way they earn their fortunes? Owning their own businesses.

Business owners may be able to take advantage of Section 179 of the tax code, which allows companies to deduct up to $500,000 in assets for the fiscal year. Plus, a measure called 'bonus depreciation' allows business owners to depreciate 50% of the cost of equipment purchased and used. It will apply through 2017, then depreciate 40% of that cost in 2018 and 30% in 2019.

'That's a big plus because you're lowering taxable income by picking up big deductions,' Piascik says. 'But be careful: They have new tangible property regulations that are in effect, and they're very detailed. But boom, there's a half million we can save right now, plus more with the 50% bonus depreciation.'

Another one that applies to small and medium-sized business owners who export goods outside the US is called the Interest-Charge Domestic International Sales Corporation (IC-DISC). This measure allows those who qualify to have the tax on half the money they earn from exports reduced by more than 50%, meaning the company isn't taxed on a large part of its profits.

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They donate stock to charitable organisations.

Wealthy people who hold a significant amount of money in investments also many choose to donate some of their stock to a charitable organisation, Piascik says, and avoid paying capital gains taxes on the stock gains.

They may get what's called a 'fair market value deduction,' which means if they paid $10,000 for stock that's now worth $50,000, they could get a tax deduction on the higher figure (although this is subject to the percentage of an individual's adjusted gross income that it represents).

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If they're self-employed, they deduct their health insurance.

'Self employed individuals are usually able to deduct your health insurance, and it's missed all the time,' says Piascik. 'It's a big number, usually.'

They choose whole life insurance.

Another strategy that's especially beneficial for wealthy taxpayers is purchasing whole life insurance, which lasts, unsurprisingly, for the policy holder's whole life. It also has an investment component, which is why it makes the list.

Note that many financial planners do not recommend whole life insurance for the typical person. Instead, many experts prefer term life insurance, which does not have an investment component and covers a policy holder for a set amount of time -- for instance, 30 years until their dependent children are grown and self-supporting.

Piascik likes the product for high net worth individuals because it provides tax-free income. 'Whole life insurance is at the forefront very expensive, but after 10 years, if you set it up right, the cash value it builds is more than you've paid for it,' he says. 'If you're paying a premium of $100,000 over 10 years, after 10 years you have value of $110,000. You're going to use this money in retirement -- but if you die before then, it's a great hedge.'

They deduct the legal fees required to secure alimony.

Only a specific subset of taxpayers qualify for this deduction, but it's a strategy that can minimise taxes if used correctly.

'Since receipt of alimony is taxable, any legal fees paid for this collection of alimony are deductible,' Piascik says. 'I always tell myself, 'Let's see if we can get it, see if it's subject to the rules.''

This strategy illustrates the trickiness of the tax code, which can be used to great effect only if the taxpayer fulfils all of the requirements. 'It always depends, and it's black or white -- any responsible firm does not go into the grey,' says Piascik. 'As CPAs, we have to have a high rate of success if we're going to sign our returns. We have to know we have viable basis if it's ever challenged.'

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