The Tax Game: How the Wealthy Pay Less and Keep More
If you’ve ever wondered how wealthy individuals manage to pay less in taxes despite earning more, the answer lies in understanding the tax code—not breaking it. The IRS tax system rewards those who invest, build businesses, and understand how to use deductions strategically. Here’s a breakdown of the most effective tax strategies used by high earners and how they can work for you.
1. How You Earn Matters: W2 vs. LLC
Let’s say two people each earn $100,000—one as a W2 employee, the other through an LLC. After taxes and deductions, the LLC owner could walk away with $87,134, while the W2 employee keeps just $79,350.
Why the difference? Business owners can deduct expenses like laptops, phones, vehicles, and travel before taxes are calculated. And if they file as an S-Corp, they can split income into salary and profit, paying less in payroll taxes.
2. Ordinary and Necessary Business Deductions
The IRS allows deductions for “ordinary and necessary” business expenses. That includes meals, entertainment, a home office, travel, and yes—even luxury cars like a G-Wagon if it’s used for business.
Even starting a side hustle, like a gardening blog, allows you to claim business expenses and offset them against your regular income. Moving from W2 employment to 1099 contracting also opens up these deductions—but it may mean giving up employer benefits.
3. Investors Pay Less Taxes—Legally
Investors enjoy lower long-term capital gains tax rates—0%, 15%, or 20%—compared to the 37% top rate for W2 income. Even more tax-efficient? Treasury bonds, which are state-tax-free.
For instance, ETFs like SGOV give exposure to short-term Treasury bonds with yields around 4.7%—a smart alternative to savings accounts taxed at every level.
4. Real Estate and the Power of Depreciation
Real estate offers unique tax perks. Properties can be depreciated over 27.5 years (residential) or 39 years (commercial), creating annual deductions that lower your taxable income—even if your property gains value.
A $250,000 rental with $200,000 attributed to the building provides a $7,200 depreciation write-off per year. If you earn $10,000 in rental income, you only pay tax on $2,800.
5. Accelerated Depreciation and Cost Segregation
Want bigger deductions up front? Use a cost segregation study. This method accelerates depreciation, allowing you to deduct $35,000 in year one, for example. That could create a $25,000 paper loss—perfect for offsetting income from your salary.
If you earn under $100,000, you can deduct that loss directly. High earners may need to carry it forward, unless they’re classified as real estate professionals.
6. Tax-Free Wealth Growth with the 1031 Exchange
A 1031 exchange lets you sell an investment property and reinvest the full amount into another—deferring all capital gains taxes. Imagine selling a property for $500,000 (originally bought for $250,000) and reinvesting that $500K tax-free.
This strategy allows real estate investors to scale portfolios, boost rental income, and continue leveraging depreciation—all without triggering tax bills.
7. Play the Game, Don’t Break the Rules
The tax code is a rulebook, not a punishment. The wealthy hire accountants and tax strategists to ensure they follow the rules while keeping more of their earnings.
Whether you’re investing in real estate, running a business, or just trying to optimize your W2 income, learning the tax game is essential for building lasting wealth.
Bottom Line
Wealth isn’t just about how much you earn—it’s about how much you keep. By understanding the tax code and using legal strategies like depreciation, LLC structures, and 1031 exchanges, you can unlock tools that the wealthy have used for generations. Start learning the rules of the game—because once you do, you’ll never look at taxes the same way again.
Jaspreet Singh is not a licensed financial advisor. He is a licensed attorney, but he is not providing you with legal advice in this article. This article, the topics discussed, and ideas presented are Jaspreet’s opinions and presented for entertainment purposes only. The information presented should not be construed as financial or legal advice. Always do your own due diligence.
