Posted on November 14, 2017

The Tax Secrets of the Uber-Rich That Could Save You Thousands


By Scott Ford, CEO, Founder & Wealth Advisor of Cornerstone Wealth Management Group

How do the uber-rich get away with paying a fraction of their fair share of taxes? What do they know that others don’t? In 2016, billionaire Warren Buffett made $11.6 million in gross income, but he only paid $1.85 million in federal income taxes. That’s a 16% effective tax rate. To go even further, his net worth increased by $12 billion, so Buffett actually paid 0.002% in taxes as a percent of his wealth.1

Many of America’s wealthiest individuals use tax laws to their benefit and as a result, they get away with paying a fraction of the percentage of taxes that you do. Guess what? You can benefit from these strategies as well.

1. Take Advantage of Lower Capital Gains Taxes

Have you heard of net unrealized appreciation (NUA)? You most likely haven’t, but it can make a significant difference when it comes to how you are taxed on your 401(k) distributions. When you take a distribution from a 401(k) you are taxed on that amount as ordinary income at the same income tax rate as your paycheck.

But it might be more effective to take advantage of lower long-term capital gains taxes. Instead of rolling the whole 401(k) into an IRA, you can first distribute company stock or its cash value out of the 401(k) and roll the remaining amount into the other account. In this way, you avoid paying ordinary income tax on the stock’s market value and only pay long-term capital gains on the stock’s cost basis.

Think of it this way: the maximum federal capital gains tax rate is currently 20%. Compare that to the 39.6% top income tax rate. By selling the stock first, you could save yourself a sizable amount of taxes!

2. File For A Section 83(b) Election

Not much is simple about taxes, but a basic explanation of an 83(b) election is that it converts future company share value growth from ordinary income tax to long-term capital gains tax. This option is limited to restricted or public company stock and must be made within 30 days of the stock grant. When you have a gain, you’re going to be taxed. But how you get taxed makes a material difference in the value of that compensation your employer is offering you.

3. Split Assets Wisely

If you are in the midst of a divorce, you need an experienced financial professional who will go to bat for you. Why? Because there are tax implications to how your assets are split with your ex-spouse. For example, if you walk away with the retirement funds, you will one day face ordinary income tax on that account. But if you get your stock assets instead, you will be responsible for the long-term capital gains tax which could be lower than your income tax rate.

4. Sequence Withdrawal Of Assets

This strategy is crucial if you are planning to pass your money on. Here’s a hypothetical situation: a 93-year-old woman owns an annuity contract of $250,000 in gains. She does not need this money to live on, but if the full amount is passed on to her son at her death, it will be subject to his income tax rate. Currently, her only taxable income is Social Security payments below the taxable threshold. By withdrawing the annuity funds $50,000 annually, she pays a very low tax rate and saves her son thousands in taxes.

5. Avoid Social Security Taxes

While Social Security benefits are not normally taxed, they could be taxed by up to 85% if you are working or have other sources of income while you are collecting benefits. Any income you earn before the year in which you reach FRA reduces your Social Security benefit once it surpasses a set yearly earnings limit. For 2017, the limit is $16,920. Once you begin earning more than the limit, your Social Security benefit will be reduced by $1 for every $2 you earn.

The income restrictions change in the year in which you reach FRA. That year there is a higher limit: $44,880 for 2017. Once your income supersedes that limit, your Social Security benefit will be reduced by $1 for every $3 you earn. As soon as you have your birthday and reach FRA, though, there are no more limits. You can earn as much as you want and it has no effect on your Social Security retirement benefits.

6. Employ Smart Charitable Giving

There are multiple techniques you can use to maximize your deduction with charitable giving. It can be especially advantageous to donate appreciated securities to avoid paying taxes on the gains. Or, you could bundle your giving together and give a few years worth of donations at once, then nothing the next year. This way you use a standardized deduction some years and itemize other years.

You could also take advantage of Donor-Advised Funds (DAFs) which allow you to offload your assets to give at any time. You donate your cash or other assets to a DAF sponsoring organization, choose your investments, decided when and how your money gets to the charities of your choice and then reap the tax benefits and maximize your donation.

7. Plan For Quarterly Tax Payments

If you are a business owner or are self-employed, you will be responsible for quarterly tax payments based on the estimates the IRS gives you. How are you paying for these? Some people take the money out of their accounts at the beginning of the year, but then they are missing out on potential market growth. Or, you can wait until the last minute and be forced to sell a security too late, not obtaining the maximum amount for the investment. What you liquidate to pay the taxes could create more taxes if you don’t have a game plan.

The Takeaway

You have options. Many people pay their taxes, complain about it, then move on. But with a bit of proactive planning, you could save yourself money, and who doesn’t want that. Everyone’s situation is unique and therefore each individual needs a personalized game plan with insight and guidance from a financial professional who knows the ins and outs of taxes. Don’t pay more taxes than you need to. If you want a second opinion on your tax strategy or want our help in creating one, call me at (301) 739-8505 or email



Scott Ford is CEO, Founder and Wealth Advisor of Cornerstone Wealth Management Group, serving entrepreneurs, business owners, executives, and their families. The firm specializes in business liquidity strategies and SBA financing strategies. It is Scott’s mission to help his clients pursue financial freedom and live a balanced and fulfilled life.

Scott is a Wealth Advisor and Registered Financial Consultant (RFC). He was recognized as one of the 20 Rising Stars of Wealth Management by Private Asset Management Magazine in 2008 based upon assets managed of $1 million or more per client. Since 2005, Scott has been an active financial technical analyst.

Clients often choose to work with Scott because of his experience with the challenges business owners and executives face as well as his firm’s disciplined process. His personal and proactive approach is designed to bring clarity and simplicity to the complex issues of financial management. For over 20 years, he has been helping his clients define and pursue their own unique version of “True Wealth.”

Scott is the author of three books: Financial Jiu-Jitsu: A Fighter’s Guide to Conquering Your Finances, The Widow’s Wealth Map: Six Steps to Beginning Again, and the New York Times Bestseller, The Sustainable Edge: Fifteen Minutes a Week to a Richer Entrepreneurial Life.

He and his wife, Angie, reside in Hedgesville, WV and have two wonderful children as well as a dog and a cat. In addition to spending time with his family, Scott is a voracious reader and enjoys woodworking, Brazilian Jiu-Jitsu, golf, hunting, permaculture and beekeeping; basically anything outdoors.