Warren Buffett Has a 0.1% Tax Rate — How To Stop Paying So Much More Than He Does
Warren Buffett is one of the richest people on the planet, with an estimated net worth of $115 billion, according to Bloomberg.
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Despite (and, alas, because of) his massive fortune, Buffett pays relatively little in taxes. According to ProPublica, Buffett’s “true tax rate” was a mere 0.1% from 2014 to 2018.
First, let’s explore why Buffett’s tax rate is so low, and then dig into how considerably less wealthy Americans can trim their own tax bill.
Capital Gains Tax
The biggest reason that Buffett pays so little in taxes is because a significant portion of his income comes from capital gains, which are taxed at a lower rate than ordinary income.
“Capital gains tax rates are currently set at 0%, 15%, or 20%, depending on your income level and the length of time you hold onto your investments,” said Sara Sharp, founder of SK&S Law Group and Acta Tax Consulting. “This means that if Buffett sells stocks or other investments that he has held for more than a year, he will pay a lower tax rate on the profits.”
Charitable Giving
Buffett is also well known for his philanthropic efforts. This saves him big come tax time.
“Through his charitable giving, Buffett can reduce his taxable income and, therefore, his tax liability,” Sharp said. “By donating appreciated assets, such as stocks or real estate, to charity, he can avoid paying capital gains tax on the appreciation and receive a deduction for the full fair market value of the donated asset.”
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Tax Code Loopholes That Serve the Ultra-Wealthy
The U.S. tax code is rife with loopholes and deductions abound for uber-wealthy people like Buffett who have the resources to take advantage of them. But Buffett has championed tax reform to help change this.
“[He] has spoken out about the need for tax reform, stating that the current system allows the wealthy to pay a lower tax rate than the middle class,” Sharp said.
In 2011, Buffett wrote an op-ed for The New York Times in which he said, “My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.”
Gift Appreciated Assets
Now, let’s discuss how Americans can reduce their tax onus. If able (and indeed most are not), one should gift appreciated assets.
“Consider giving valued property to a qualifying charity to earn a tax benefit rather than selling it and paying capital gains taxes,” said Matthew Meehan, CEO of Shield Advisory Group.
Deduct Work-Related Expenditures
Self-employed and partially self-employed people should be proactive in deducting legitimate business expenses.
“Depending on your profession and the details of your situation, you may be eligible to deduct any unreimbursed work-related expenses,” Meehan said.
Make House Renovations and Car Choices That Save Energy
“Some house renovations that save energy, such as solar panels or electric car charging stations, may be eligible for federal tax credits,” Meehan said.
Purchasing a new electric vehicle (EV) from an auto dealership can also get you a tax break — either $4,000 or 30% of the sale price of the vehicle — whichever is lower.
Maximize Your Retirement Contributions
One of the most tried and true ways of decreasing your tax burden is by contributing to your retirement accounts, like a 401(k) or IRA.
“[This] is an excellent way to lower your taxable income,” said Percy Grunwald, co-founder of Compare Banks.
Think Bigger Than This Year
You may start your journey to trim your tax bill by thinking, “What can I do this year?” It’s better to broaden your outlook and ask yourself, “What can I do over this lifetime?”
“I like to think in decades, which really allows you to really start strategizing for how to lower your lifetime tax bill instead of a single year in isolation,” said David Dodd, CFP, CKA, founder and financial planner at The Other 90 Financial, LLC. “Instead of treating each year separately and looking in the rearview mirror, look through the windshield and think about where things are going in the long-term.”
Opt For Passive Funds When Investing
Money kept in taxable brokerage accounts (i.e., non-retirement investment accounts), is taxable in the current year if it generates income or a realized capital gain. To avoid this tax, be more discerning in the investments you choose to lower the likelihood of generating unwanted taxable income.
“One quick win is to consider the type of investing the funds you own are doing,” Dodd said. “If they are ‘active’ funds/ETFs that are trying to outperform, they may be doing more trading and have higher turnover in their portfolio holdings. Because of this, they will have to pass along that additional income to you.
One quick way you may be able to reduce unwanted income would be to pick ‘passive’ funds that are not actively trading to attempt outperformance but instead tracking a benchmark. This will result in less unwanted taxable income.”
Tax-Loss Harvest
One can also tax-loss harvest in your taxable accounts — which is a more advanced tactic.
“If you liquidate or sell a holding and generate a capital gain, be sure to see if you have any losses to offset those gains,” Dodd said. “There are specific ordering rules to offsetting capital gains, but you essentially net short-term gains and short-term losses against each other, long-term gains and long-term losses against each other, and then the resulting gain/loss from the two previous netting processes. In doing this, you can reduce the gain which would have been taxable.”
Dodd added that you can also strategically take a loss and apply that tax loss from your investments against up to $3,000 per year of your ordinary income.
“This is great since your ordinary income is likely taxed at a higher rate than your capital gains tax rate,” Dodd said. “In addition, you can ‘carry forward’ the loss to use in future years if you don’t absorb it with any capital gains.”
Seek Professional Advice
Last but not least, Varsha Subramanian, CPA with tax service company FlyFin, said that professional advice is worth paying the big bucks for. “A qualified tax professional can help you navigate the tax code and identify deductions and credits you may be eligible for,” she added.
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