TAXATION MANAGEMENT

WHY PEOPLE PAY TAX?

Whenever we say "TAX," we typically think of an income tax, such as a personal income tax, corporate income tax, property tax, or consumption tax. Taxes, however, are not just an extension of income tax. In addition, they are employed in other sectors of the economy and as payment for government services.
"Tax is the cash you give to the government in exchange for the public services they offer you. The primary source of income for the government is taxes, which are based on your income.

The most popular and significant form of government intervention used to redistribute income among the populace is taxation. Through a progressive taxation system, it aims to distribute the cost of economic expansion.

The advantages of paying taxes are numerous. They assist in building and maintaining infrastructure, such as roads, and they can even assist in establishing or maintaining the institutions required for the rule of law and the smooth operation of the democratic process.

Taxes provide the government with the money it needs to finance public expenditures like constructing roads, schools, and hospitals as well as local government services like police and fire departments, parks and playgrounds, and public libraries.

WHO PAYS TAX?

The type of tax and any related regulations will determine the taxpayer. Federal income tax regulations, for instance, typically only apply to those who have an adjusted gross income of a certain amount. Corporate taxes may only apply to businesses that have operated in a particular region or are incorporated to conduct business within a particular nation. There are frequently exceptions and restrictions for who the tax applies to, and each tax is handled differently.

HOW RICH PEOPLE AVOID PAYING FROM TAX

America's billionaires use tax-avoidance methods that are out of the grasp of the average person. The increasing value of their assets, such as stock and real estate, is the source of their wealth. Those gains are not considered taxable income under US law unless and unless the billionaires sell.

For middle-class Americans, such as wage earners in their early 40s with typical wealth for their age, the situation is entirely different. Such households saw an average increase in their net worth between 2014 and 2018 of about $65,000 after taxes, primarily as a result of an increase in the value of their homes. However, because the vast majority of their income came from salaries, their tax obligations during that five-year period were almost as high—nearly $62,000.

Buffett, the grandfatherly billionaire, avoided taxes more than any of the other 25 richest people. Given his public support for higher taxes for the wealthy, that might come as a surprise. Forbes estimates that between 2014 and 2018, his wealth increased by $24.3 billion..

- A method of transferring valuable assets to others (such as your children) while evading the federal estate tax is by freezing the trust. To keep all asset appreciation out of the estate and any taxes, "freeze" the value of your assets several years before you intend to pass them on.

- Tax havens: Establishing a business or keeping funds in an account in a nation with reduced taxes. Offshore tax havens are where $21 trillion is being concealed. Examples include: Tax havens have at various points benefited David Bowie, U2, and the Rolling Stones. The Cayman Islands are a well-known tax haven, with more registered businesses there than there are residents (more than 85,000).

- Capital gains tax: A tax on the profits from the sale of non-inventory assets like stocks, bonds, real estate, or precious metals that were initially purchased for less money.
Frequently used flaw buying stock options, which fixes the share price at a set amount, and then taking out a loan from an investment bank using the shares as security.
Then, to avoid paying capital gains tax, the borrower repays the loan either by selling the shares or by using the money earned from the borrowed funds.

Some Steps How Rich People Avoid Paying Taxes Are as Follows: -

- Make an 80C claim for stamp duty and registration expense. Many people are unaware of the fact that the stamp duty and registration costs for the house's documents can be deducted under section 80C in the year of the house's purchase. It's vital to keep in mind that in order to qualify for these deductions, you must actually own the home. Therefore, you cannot claim this deduction for properties that are still under development. According to the income tax

- Getting deduction for rent even without HRA. All the salaries class people get HRA from their companies, and hence they claim deductions on that.
Under Section 80GG, you can claim deduction of the rent paid even if you don’t get HRA. However not many people are aware of this deduction. If you are not being paid any HRA or don’t have any housing benefit from employer. You can claim least of following 3 things as HRA: -

a) Rent paid less 10% of total income

b) or Rs 2,000 a month;

c) or 25% of total income.

- Many people fail to disclose their losses in real estate, gold ETFs, mutual funds, and equities on their tax returns. This is a serious error since you miss the chance to reduce your tax liability in the future. You are able to offset your losses against both present and future profits. For instance: Let's say you sold your real estate and after indexation generated a profit of 10 lacs. A tax of Rs 2 lac @ 20% will be due from you. However, if you also had a loss of Rs. 4 lacs in stocks that same year, you can set this loss off against your profit of Rs. 10 lacs and only pay tax Rs. 6 lacs, which is equal to 1.2 lacs.

- Choosing an education loan in your children's names would be a wise choice because you can deduct all of the interest paid under Section 80E. You should be aware that it is only accessible if you are a parent or legal guardian. Your spouse's education loan is not deductible. Another option is to take out student loans in your children's names so that when they pay them back over time, they can independently claim the deductions. In addition, they'd be more accountable, and paying back their student loans out of pocket will prevent them from splurging excessively and allowing you to use your money now elsewhere.

Establishing a foundation must dedicate 5% of its resources to charitable causes every year. However, "charitable purposes" also refer to the wages paid to the staff members who manage the foundation's daily operations. Donald Trump had a foundation. The Boy Scouts received funding from it. However, his son's annual dues were paid for by the money given to the Boy Scouts. It donated money to a Florida charity recently withdrawing its lawsuit against Donald Trump. During Donald Trump's campaigning in Iowa, it donated money to a local charity. Now, the majority of foundations actually carry out practical charitable work. However, some of them only exist to pay money to family members of the person who founded them and to postpone paying capital gains taxes on stock.

THE RICH ARE NOT LIKE YOU AND ME THEY PAY LESS TAX

REAL LIFE EXAMPLES

Pays primarily capital gains tax versus income tax

Because Warren Buffett is taxed primarily on capital gains income as an investor as opposed to his secretary, who is taxed on a salary or other earned income as an employee, he pays less tax overall than his secretary. As CEO of Berkshire Hathaway, Buffett does pay himself a modest $100,000 salary (the same for the past 25 years, according to Investopedia), but the majority of his income comes from stock market investments. Additionally, even though the TJIA did not change the long-term capital gains and qualified dividend taxes (taxed at 0%, 15%, and 20%), they remained significantly lower than the rates on ordinary income.

Warren Buffett makes major contributions to charity:

By making significant contributions to charities like the Bill and Melinda Gates Foundation, the Oracle of Omaha further lowers his salary. Instead of leaving the majority of his wealth to his heirs, Buffett has made it his mission to give it away. He even supports raising the estate tax.

Takes advantage of new tax law:

Last year, Berkshire Hathaway's net wealth grew to $63 billion, with the change in tax legislation accounting for $29 billion of that rise. Buffett stated that there were two main causes (CNBC). A new Bonus Depreciation for fixed assets, which covers the acquisition of cars, was one. For instance, Buffett used to deduct 10% annually, or $1 million year, from a $10,000,000 asset, but now he deducts 100% in the first year. The corporate tax rate decreased from 35% to 21%, which he calls a "huge tailwind," and was the second biggest change.

JEFF BEZOS

The millionaire CEO of Amazon, Jeff Bezos, apparently did not pay any federal income taxes in 2007 or 2011. Elon Musk, the millionaire CEO of Tesla, apparently carried out the same action in 2018.

That's according to private tax records submitted to the Internal Revenue Service that ProPublica was able to get and which were made public in a shocking new exposé on some of the richest people in the world.

With a net worth of $188.8 billion, Bezos is now ranked as the richest person in the world by Forbes. With a net worth of $153.3 billion, Musk comes in second place on the Forbes list.