The Blubber

Tesla CEO Elon Musk recently claimed, while campaigning for President-elect Donald Trump, that he is the largest individual taxpayer in history, stating he paid over $10 billion in taxes to the Internal Revenue Service (IRS). Musk joked that he wished the IRS would award him a trophy—"even a small, inexpensive one like those given at kids' karate competitions." Despite not receiving any recognition, he said he was content to pay taxes for the benefit of society.

However, a ProPublica analysis of IRS data from 2014 to 2018 revealed that Musk paid no federal income taxes in 2018. In another example, Michael Bloomberg reportedly used over $1 billion in deductions to significantly lower his tax liability. Between 2013 and 2017, Bloomberg deducted an average of $409 million annually for state and local taxes. Similarly, billionaire investors Carl Icahn and George Soros avoided paying federal taxes for several years during the same period, despite substantial increases in their net worth.

Higher Income Doesn’t Always Translate to Higher Tax Rates for the Wealthy

A ProPublica report examined the 25 wealthiest Americans' net worth growth compared to their tax payments between 2014 and 2018. During this period, their collective wealth grew by $401 billion, but they paid only $13.6 billion in federal income taxes, reflecting a "true tax rate" of just 3.4%. While tax rates typically increase with income for most Americans, high-net-worth individuals (HNIs) often employ strategies to significantly reduce their taxable income. Most of their wealth stems from the appreciation of assets like stocks and real estate, which are not taxed until sold.

In contrast, middle-class Americans primarily rely on income from wages. For example, during the same period, households with earners in their 40s saw post-tax net worth growth of approximately $65,000, largely due to home value appreciation. They paid an average of $62,000 in taxes, as most of their earnings came from salaries.

Musk and Buffett: A Case Study in Tax Strategies

Although Musk claims to have paid billions in taxes, the structure of his wealth allows him to reduce his liabilities. From 2014 to 2018, his net worth grew by $13.9 billion, while his reported income was $1.5 billion. This resulted in him paying $450 million in taxes at a true tax rate of 3.27%. In comparison, Warren Buffett’s net worth grew by $24.3 billion during the same period, but his reported income was only $125 million. Buffett paid $23.7 million in taxes, representing a true tax rate of just 0.10%.

Strategies for Reducing Taxes on Retirement Savings

The U.S. Treasury estimates that the top 1% of earners leave over $150 billion in taxes unpaid annually, using a variety of strategies, including tax-advantaged retirement accounts. Traditional 401(k) accounts are a popular option, allowing individuals to grow pre-tax contributions tax-free until withdrawal in retirement. For those without 401(k) access, Individual Retirement Accounts (IRAs) offer similar benefits but with lower contribution limits.

Wealthy individuals like PayPal founder Peter Thiel have taken advantage of "backdoor Roth IRA" strategies to eliminate taxes on retirement withdrawals. Thiel famously grew his $1,700 Roth IRA to $5 billion, and he won’t owe taxes on withdrawals. Roth IRAs require post-tax contributions and ensure tax-free withdrawals later, but they are restricted to individuals earning under $161,000 in 2024. HNIs bypass this limit by converting traditional IRAs to Roth IRAs, paying taxes on pre-tax contributions and gains just once. Once converted, all future withdrawals are tax-free, effectively sidestepping long-term tax liabilities.