Money Rehab with Nicole Lapin - How to Work the Tax System like Elon Musk

Episode Date: July 21, 2021

Elon Musk, doggie coin enthusiast and second-richest person in the world, has skirted through tax season without paying a dime in federal income taxes. How did he do it? Listen to find out! Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never do it. You think the whole world revolves around you and your money.

Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. I hate to ask you to do this, but I want you to travel back in time with me to 2020.

I know, it sucks. No one wants to go back there. And I haven't even told you the worst part yet. We're traveling back to the 2020 presidential debates. I know I'm trying to make a mental note here to use thunder strikes and spooky music in the background because that's what's playing in my brain any time I think about the days before Trump was kicked off Twitter and out of the White House. Anyway, do you remember during the debate when Trump was kicked off Twitter and out of the White House. Anyway, do you remember during the debate when Trump was asked about his taxes and the nation found out that Trump was getting

away with paying just 750 buckaroonos in federal income tax? $750! That's it! That is insane! $750 that's it that is insane when I was making peanuts at my first television gig I was paying more than $750 in income taxes. True story we put the first draft of this episode together just before the investigation into the Trump organization made a splash in the headlines. At that time here's what I was going to say. I actually don't want to use Trump as an example of working the tax system because, well, I hate to say his name, but also because he didn't outsmart the system. He pulled some pretty shady tax moves that didn't really follow the letter of the law. So that's what I wrote a few weeks ago. Uh, could you say foreshadowing anyone? I could be a psychic, truly. Cut to the Trump Organization's chief financial officer being charged with grand larceny and tax fraud just

days later. So yeah, I'm not going to recommend that any money rehabbers use Donald Trump as a model for savvy tax practices, but there are plenty of uber wealthy Americans who have gotten away with some tax wizardry while staying completely above board. ProPublica reports that in 2007, Jeff Bezos, then a multi-billionaire and now the world's richest man, founder of course of Amazon, yes that Jeff Bezos, he did not pay a penny, a single penny, in federal income taxes in 2007. And then again in 2011. Elon Musk, doggy Dogecoin enthusiast, the second richest person in the world, also has skirted through tax season without paying federal income taxes. And income taxes is just the starting point for this tax tomfoolery. Peter Thiel, the guy behind

PayPal, took his Roth retirement account and turned it into a billion dollar piggy bank. Not to mention, you may get a huge head start on these tax loopholes if you're born into money. Oftentimes, inheritance isn't taxed. So when you're passed down that silver spoon, that's all yours, baby. So how do all these old, rich, white guys, for the most part, get away with bloody murder on their taxes? And how can I, too? Historically, our perception of these men has been that they're geniuses. They worked around tax loopholes because they are financial gurus.

They outsmarted the IRS and if we were all just a little smarter, we'd be like them too. That is absolutely wrong. The truth is our tax system is structured to help out those in need, but the structure has also left many loopholes for the wealthy to keep getting wealthier. And so these men aren't finance geniuses per se. They're just exploiting this lopsided system. The bad news is not all of us can use these loopholes because they're not available to most of us.

This is why many people advocate for increasing taxes on the wealthy. It's not like Bernie Sanders, the patron saint of taxing the wealthy, feels like taxes should suck more for everyone. This is America. We love a good old rags to riches story. If the growth opportunities that Bezos has enjoyed were available to everyone, then taxing the wealthy wouldn't be as big of a deal. But these growth opportunities are not available to everyone. If all of us money rehabbers were able to make billions of dollars off of our Roth IRAs, all of a sudden, financial institutions would shut it down. You don't believe me? Well,

that's exactly what happened with GameStop. These tax tricks aren't wrong because some people are able to make money off them. No, no, these tax tricks are wrong because some people will never be able to make money off them. And that is inequality. full stop. Hold on to your wallets, boys and girls. Money rehab will be right back. Now for some more money rehab. Let's look closer at Peter Thiel and his billion dollar Roth. Remember our recent episode about Roth IRAs? Of course you do. I mentioned that you're probably not going to get rich off your Roth IRA. So you're thinking, what the fuck, Nicole? I could have used my Roth to become a billionaire? Why did you cock block my wallet, biznatch? Trust me, I didn't. You'll

remember that the annual contribution limit for a Roth IRA is $6,000. And typically, you can't accumulate billions of dollars with $6,000 a year. ProPublica points out that in recent years, the average value of a Roth IRA at any given time was about $39,000. But if you're Peter Thiel, you have opportunities that the rest of us don't have. See, there are two kinds of banking in this world. There's banking for people like you and me, where we have to call the number on the back of our cards to get anything done with our bank account. But then there's banking for people like Peter, who go golfing with the CEO of their bank and have their account rep on speed dial because business owners like Peter Thiel

can make banks big money if they IPO. So Mr. Thiel took the $6,000 in his Roth IRA and was able to use that money to make great investments for pennies on the dollar that not all of us get access to. These investments made huge returns, And then he reinvested those returns. And then reinvested the returns on his returns. And then two billion dollars later, here we are. But it's not all doom and gloom. There are some tax hacks from Elon Musk that us money rehabbers can do too. Number one, invest. One thing that all of these tax-free twerps have in common. Wait a second. I'm actually going to start that sentence over again. These tax-free twerps have a lot of things in common. They are men, they are white, they are

old, their hairlines are retreating faster than their first wives, and they prefer stocks over income. Why? Well, the answer, my friends, lies in Money Rehab episode 27, where we talk all about capital gains tax. As a refresher, if you keep a stock for longer than a year before selling it, the money that you make in that sale will likely be taxed at a lower rate than how much your income is taxed at. If your income is $400,000, you'll be taxed at a 35% rate, and you will be giving over $100,000 in federal taxes. Ouch. But if you made $400,000 in the stock market by selling stocks that you bought over a year ago, you'll be taxed at a 15% tax rate, and you will only have to give $60,000 back in taxes. Yeah, 15% still hurts,

but it hurts a hell of a lot less than 35%. That's a $40,000 difference. Number two, start a company. This brings us to the next thing that all these tax hackers have in common. They all own businesses. As we've learned on the show, the tax system is much friendlier to businesses than it is to individuals. This is a bit of a pro move, but it's true that if you own your business, you can write off expenses that you otherwise wouldn't be able to. But you're also diving into murkier tax waters and you will need a stellar accountant or you risk sinking. Number three, leverage an asset. We are getting increasingly into precarious tax territory, but I told you that I'd give you insider tax tips. So with that disclaimer, that's what I'm going to do.

Another way these gazillionaires beat the system is by borrowing against an asset they own and investing what they borrow. So what does that mean? Well, say you're Bill Gates and your house is valued at $8 million. True story. Because you're Bill Gates, you also have great credit. So you can go to the bank and be like, hey, I'm Bill Gates. I'd like a really big loan. Let's call it $6 million. And you know, duh, I'm good for it. Hello, I'm Bill Gates. I started Microsoft. The bank will probably say, of course, Mr. Gates, do you want that in 50s or 100s? And then Bill has $6 million to play with. And because he's in this elite circle of wealth, he'll probably use that money to make more money. Because this is how it works when you're Bill Gates. Oh, I almost

forgot the best part. That six million bucks? Tax-free. If we rewind to the beginning of this story, where Bill first got the idea that he wants $6 million, he probably weighed his options. Can he ask for a $6 million raise? Maybe. But then that $6 million would be classified as income and therefore taxed to the high heavens. No, thank you. Instead, Bill decided to borrow the $6 million from his bank, which doesn't count as income. It's technically a loan, and therefore tax-free. But wait, you might be thinking, did Bill forget about the interest on his loan? Nope, Bill certainly did not. Say his interest rate is 3%. Historically, the stock market has grown at 8%. So if Bill invests wisely, he's still up 5% on his $6 million, which is pretty damn good. But tax danger. This is an

extremely advanced move. I do not recommend doing this unless your credit is in tip-top shape, you have zero credit card debt, and you are very, very advanced and comfortable investing in the stock market. You can see how easily doing something like this could ruin your life. Say Bill invested that $6 million in the financial equivalent of Fyre Festival, and it vanished out of thin air. When the bank comes calling for their money back, Bill will have to kiss his house goodbye. Obviously, if this were to happen, Bill Gates himself would be totally fine. The wealthy are like cats. They have nine lives. If Bill Gates were to lose his $8 million house, he'd be able to cash out another investment and buy another one. No problem. But for those of us who have this one financial life, putting our house on the line for a shot

at making it in the market is not a risk worth taking. Instead of taking out a loan to invest in the market, just allocate some of your income you're allocating toward your end game and invest that. You can rest easier at night knowing your bed isn't going to the bank. But here's a tip you can take straight to the bank. If I've sold you on investing, go back and listen to the Index Funds and Chill episode. The market has historically returned at an 8% growth rate, and that's a much safer bet than betting the farm. Money Rehab is a production of iHeartMedia. I'm your host, Nicole Lappin.

Our producers are Morgan Lavoie and Catherine Law. Money Rehab is edited and engineered by Brandon Dickert with help from Josh Fisher. Executive producers are Mangesh Hatikader and Will Pearson. Huge thanks to the OG Money Rehab supervising producer, Michelle Lanz, for her pre-production and development work. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.