Tax Dodging Shortcut

So you don’t want to pay a bunch in taxes. Yeah, we hear you. Solution? Absolutely. All you have to do is move to Washington and go to work for the president. Seriously. Former Treasury Secretary Hank Paulson sold $500 million of his stock in Goldman Sachs shares and didn’t pay one single USD in capital gains. That’s right. Your blue collar pay check goes right to the IRS and if you trade stocks you’re getting hit with taxes anywhere from 5% to 15%, but not a single cent of this former US government employee’s hundreds of millions of dollars went to the IRS.

Isolated incident you might think? I think not. Secretary Paulson’s predecessors Robert Rubin and Paul O’Neil also enjoyed a luxurious tax dodge as well. Don’t think that others have not been graced with the same practice. Names like Rumsfeld and Evans too, have not been taxed.

 Now if you know your politics, you may be mulling over the fact we have laws that have been put in place to cease these practices. George Bush Sr. passed the Ethics and Reform Act of 1989 that supposedly did away with honoraria on Capitol Hill. At face value, the act placed employment restrictions on Congressmen, increased disclosure of financial dealings, and reformed the savings and loan industry to combat the crisis back in the late 80’s and early 90’s. It also allowed Freddie and Fannie to support mortgages for low- and moderate-income families (not that that would become a problem).

So now we have this act which “discourage[s] able citizens from entering public service”. Before this Section 1043 cabinet members and judges way up the chain had to sell off their positions in other companies that were a conflict of interest in their presently held government office. But now these officials get a onetime roll over, transferring their shares to treasury bonds or broader market funds; thus avoiding the taxes that go along with an immediate sale.  Thanks George.

This means the deferment of taxes on the sale of Paulson’s 3.23 million shares equates to tens of millions of dollars. This tax shelter exists for not only almost every appointed executive, but their spouses and dependants as well. The public servant field of play is not at all reachable to the average investor. However, investors can experience no capital gains taxes on the trade of small business stock (ie. companies that have $50 million or less in assets), but everybody gets that incentive.

Fight back against the labyrinth of tax code! The best way to do so is to optimize your once a year “gift” option. If it is $13k or less no taxes will accrue. So hypothetically, you can give your kids the stock and they can sell it at a much lower tax rate. If it is to your spouse and he/she is a U.S. citizen, then due to the unlimited marital deduction you can gift any amount to them without incurring any federal gift tax or state gift tax consequences as long as the gift is of a present interest. Perfectly legal. You just need a little trust. Just know if you give more that your annual exclusion amount you’ll be looking at a gift tax.

Everything I have learned about finance and tax code has been from trial and error. What I have learned is not to just accept your fate like an animal in a snare or bear trap. These guys in DC have found a shortcut to make money. You should too.