Here's Why Taylor Swift and Other Celebrities Pay Less in Taxes Than You
You’ve probably heard people accuse celebrities and high net-worth individuals of dodging taxes altogether. But that’s not usually true. They pay a smaller percentage of their income in taxes than the average American does. The wealthy pay taxes like everyone else. The only difference is the strategies most people never have access to.
Here’s how Taylor Swift and other celebrities pay less in taxes according to tax experts.
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They Operate Like Business Owners
One big reason celebrities often have a lower effective tax rate is that many don’t earn income as traditional employees. Instead, they operate through corporations or other business entities that permit them to deduct allowable business expenses before paying any taxes.
"They're always thinking about how to get everything to be a business write-off," said David Perez, founder and CEO of Tax Maverick. "Businesses don't necessarily pay less in taxes, but they get bigger expenses, which lowers the actual taxable income to the individual."
That doesn't mean personal expenses are automatically tax write-offs. The IRS says business expenses must be ordinary and necessary for the business.
Strategic Geography
For many wealthy people, tax planning goes beyond income and investments to where they live and do business. High-net-worth taxpayers often will establish residency in lower-tax states.
“Average workers are typically tied to their jobs and the local tax rates of their home states. Celebrities, however, have the capital to be highly mobile,” said Perez. “Their legal teams strategically establish their primary residences in states with zero income tax.”
Moving solely to pay less in taxes may not be worth it for everyone. But if you do, understanding how state income taxes and business laws will affect your bottom line could save you money in the long run.
They Use Charitable Giving and Tax Credits Strategically
Celebrities are also often intentional about taking advantage of loopholes built into the tax code. One strategy is charitable donations.
“The tax code allows for donating appreciated assets to charitable organizations, and celebrities are often taught to use such donations to their advantage,” said Gene Bott, tax advisor at Tax Hive.
He also said high-income taxpayers aggressively claim tax credits and incentives tied to government priorities, such as supporting green energy initiatives. Many tax credits reduce your tax bill dollar for dollar.
They Live Off Investment Income Instead of Taxable Income
Another big difference is that celebrities and high-net-worth individuals don’t rely on a taxable paycheck to fund their lifestyle, but more on investments.
Perez explains why most ultra-wealthy people are paid in stock or investment assets. “To access cash without triggering a massive tax bill, celebrities use a strategy known as buy, borrow, die,” he said. They borrow against the value of their assets rather than sell them. Since loans are not considered taxable income, “celebrities can spend those millions completely tax-free.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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