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False Profits

Offshore tax havens used by individuals and corporations cost governments trillions of dollars annually. Economists estimate that individuals have stashed anywhere from $8.7 trillion to $36 trillion in tax shelters around the world. But not all of the tax reduction tactics favored by the rich involve offshore accounts in the Cayman Islands or Bermuda. There's a variety of places the rich hide money to lower their tax burden and shelter income, many quite straightforward.


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Qualified Opportunity Zones

Investing capital gains in businesses in Qualified Opportunity Zones is a newer approach to sheltering income, says Phil Strazzulla, a former venture capitalist and founder of Select Software Reviews, which reviews human-resources software. Created in 2017 under the Tax Cuts and Jobs Act, these zones are disadvantaged neighborhoods and communities across the country in need of economic development and job creation. The law offers pretax benefits for capital gains investments in the zones as long as it's within 180 days of getting the gains. "If your new investment lasts more than 10 years, you don't have to pay any taxes on any incremental gains," Strazzulla says.

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Municipal Bonds

It may sound counterintuitive to protect money from being taxed by giving it to the government, but Andrew Latham, director of content at the site SuperMoney and an expert on tax topics, says municipal bonds can be effective shelters and are a popular way to earn tax-free income. "Governments at every level issue municipal bonds to finance large-scale projects like schools and highways. These bonds are generally safe investments with interest rates that exceed those paid by ordinary savings accounts," Latham says. Under most circumstances, earnings from municipal bonds are exempt from federal income taxes — and are also available to ordinary taxpayers.


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Life Insurance

Don't skip the whole life insurance policy. "Similar to a Roth IRA, taxes have to be paid on money prior to going into a life insurance policy. But once the money is in the policy as part of the cash value, it is tax-free, provided the policy is structured correctly," financial adviser Adam Doran says. The "contributions" or premiums on the policy are not reported to the IRS, nor are distributions when the policy owner accesses the cash value through policy loans. "These loans can serve as investment capital to purchase real estate, businesses, or anything else," he says. "They can also be a form of tax-free income in retirement, as they don't have to be paid back during the policyholder's lifetime." In addition, outstanding loans at the time of the policy owner's death are paid by the policy's death benefit, and the remainder of the death benefit goes tax-free to named beneficiaries.


Related: Ways to Prepare for the Loss of a Spouse

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Charitable Investments

One of the easiest ways to dodge some taxes is by making sizable donations to charities. "You can donate up to $100,000 directly to the charity, but you can also donate to a charity savings account," says Chane Steiner, CEO of the personal finance site Crediful. A charitable savings account, also known as a donor-advised fund, is similar to opening a checking account, but one that holds funds earmarked to be distributed to a charity at your suggestion at a later date. "These funds can be deposited into the account and act as an immediate tax write-off even if they haven't been distributed."


Related: Tips for Making Tax-Deductible Charitable Donations

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Offshore Accounts Around the World

Perhaps one of the most notorious ways people hide money: opening offshore accounts. These are typically in tax havens, places with little to no tax liability, says Josh Zimmelman, owner of Westwood Tax & Consulting, a New York accounting firm. Popular examples include countries in the Caribbean and Switzerland. A Financial Secrecy Index produced by the Tax Justice Network ranks Switzerland and the Cayman Islands as some of the top places for hiding private wealth, with $21 trillion to $32 trillion worth of private wealth in what are called "secrecy jurisdictions" where the money is lightly or entirely untaxed. But there are plenty of those in the United States as well, including South Dakota and Nevada.


Related: Countries Where You Can Live Comfortably on Social Security

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Shell Companies

The rich sometimes hide money by opening up shell corporations that don't have their names attached. "It can be difficult for law enforcement or tax authorities to figure out who owns the corporation, so they don't know whose money it is," Zimmelman says. "Setting up interlocking entities in different places makes it even harder. For example, a fake corporation in one country might control a trust in another country that has a bank account in yet another country."

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Financial Gift Giving

Financial gifts of various types can be made tax-free up to a certain level. "Sometimes people will hide funds by giving a portion of it to their children or other trusted friends or family for whom the tax burden wouldn't be as great," Zimmelman says. The U.S. federal gift tax is paid on cash or properties that individuals give to others. The law allows for giving as much as $16,000 tax free, and rises to $17,000 in 2023. The gifts can be all at once or in small increments and can go to any number of people.

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Offshore Subsidiaries

Multinational corporations are among the most legendary dodgers of tax responsibilities, and it starts by registering a company or a subsidiary in certain countries. "A U.S.-based company with worldwide income would set up an offshore company in a country with a low corporate tax rate. Since the corporate tax is paid on net income, a company would shift income to a country with the lower tax rate and shift expenses to the country with higher tax rates," says Peter Greco, CPA and founder of CSI Group, which works for international and expatriate clients. According to the International Monetary Fund, corporate tax havens and similar maneuvers cost governments about $500 billion to $600 billion annually in lost corporate tax revenue. IMF estimates some multinational corporations have hundreds of offshore subsidiaries.


Related: Destinations Where Your Dollar Will Go Far

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199A Deductions

Creating a sole proprietorship, partnership, S corporation, trust, or estate is another way to qualify for a substantial tax deduction not available to rank-and-file wage income earners. The 199A deduction allows those who have qualified business income from either a domestic business that's operated as a sole proprietorship, partnership, S corporation, trust, or estate to deduct as much as 20% of that income. According to the IRS, the deduction not only allows eligible taxpayers to deduct up to 20% of their qualified business income, it also allows for deducting 20% of qualified real estate investment trust dividends and qualified publicly traded partnership incomes.

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Retirement Funds

While not a technique exclusive to the very wealthy, squirreling away as much money as possible in a retirement fund is an effective tax shelter. With an IRA, you can defer paying taxes on up to $6,000 per year, reducing taxes at the end of the year. A 401(k) allows you to defer taxes on up to $20,500 per year as of 2022, which is up $1,000 from 2021. "If you go with a Roth IRA, any earnings made from investments won't be taxed," Steiner says.


Sponsored: Find a Qualified Financial Advisor


Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.


Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you're ready to be matched with local advisors that can help you achieve your financial goals, get started now.