Places Where the Rich Hide Money From the IRS (2024)

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 trillionin tax shelters around the world. But not all of the tax reduction tacticsfavored 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 burdenand shelter income, many quite straightforward.

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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 SuperMoneyand 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 circ*mstances, earnings from municipal bonds are exempt from federal income taxes — and are also available to ordinary taxpayers.

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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.

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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."

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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 Indexproduced 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.

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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.

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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.

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