How Much Taxes Does Elon Musk Pay?
Tesla and SpaceX CEO Elon Musk’s net worth is estimated to be close to 30 billion dollars, and with such a tantalizing figure, people often wonder how much money he is paying in taxes. It is a complex answer, but in order to understand the details involved in his tax planning strategy, we can take a closer look at the variety of tools Musk uses to minimize his overall tax bill.
One of the key strategies used by Musk to reduce his taxes is by taking advantage of several provisions in tax law that allow wealthy entrepreneurs to defer or delay their taxation on the profits of the stock sales that are part of company buyouts and exits. A discussion of some of the major strategies and techniques Musk and his team use to minimize his taxes is outlined in the following sections.
Stock Options and Qualified Small Business Stock
Musk often receives stock options and qualified small business stock as part of his compensation packages. These types of stocks allow him to defer taxes on the sale of these assets until they are sold. Thus, the amount of taxes he is paying out each year is decreased substantially. In addition, he is able to benefit from other provisions of the Small Business Tax Act, such as being able to deduct 50 percent of his annual income.
In 2017, Musk was able to cash in around a billion dollars in stock options and investments, but because of the aforementioned tax strategies, the vast majority of it was taxed at the more favorable long-term capital gains rate – which is much lower than the ordinary income tax rate.
Charitable Contributions
Musk also takes advantage of charitable giving provisions, which allows him to donate funds to charities and other organizations that are exempt from federal taxes. This allows him to reduce the amount of money he has to pay in taxes and still support the causes he believes in. By doing this, he can also benefit from the charitable contributions tax deduction, which is a way of reducing his taxable income and thus his overall tax bill.
He has also established foundations, such as the Musk Foundation, which immediately invests the funds it receives into various projects and initiatives. The foundation also ensures the money is used in a way that makes sense and benefits the community, rather than just being spent on personal ends. Furthermore, in order to take advantage of lengthy tax breaks, he is also donating with the plan to make sure the funds remain in the account for extended periods of time.
Tax Planning Strategies
In order to primarily make use of his financial resources for something other than taxes, Musk hires experienced advisors who know how to navigate the complexities of the tax system. These advisors help create comprehensive tax planning strategies that could contain a combination of stock purchases, option trades, donations to charities, and deferred tax payments. They are also able to provide guidance on financial topics such as investing, retirement planning and estate planning. This helps Musk to both minimize the amount of money he pays in taxes while still taking full advantage of the various tax breaks the government provides.
Zero Tax Payments
Another strategy Musk is using to minimize his taxes is to remain domicile in a state with no personal income taxes. Musk resides in California, however, he does own property in other states with lower (or no) taxes. This allows him to stay in California and yet not be burdened with additional taxes on his income from sources in other states. This means that he likely pays zero taxes on money from activities such as investments and sales of stocks.
In addition, due to California’s low corporate tax rate, Musk can take advantage of favorable deductions, such as amortization of intangible assets like patents. This further decreases the amount of money his companies pay in taxes. Furthermore, the state allows companies to report income derived from patent royalties and other intangible assets as a setoff against the corporation’s taxes, further reducing his expected tax bill.
Tax Minimization Strategies Over Time
To ensure he is always able to minimize his taxes and still take full advantage of the various tax laws in different countries, Musk and his advisors are able to employ complex strategies, such as foreign tax credits, deferral strategies, utilization of pass-through entities, and other tax-saving strategies. All of these strategies help keep his total tax burden low and put more money back in his pocket.
Although it’s clear that Musk is, technically, paying taxes on his income – there are many ways in which he’s been able to minimize his tax burden over time. By leveraging the various tools available in the tax code, as well as utilizing experienced advisors, Musk has been able to take advantage of the various loopholes and deductions afforded to him and minimize the amount of taxes he has to pay.
Tax Credits
In addition to the strategies discussed above, Musk also takes advantage of tax credits. These credits can reduce taxes on a variety of activities such as research and development, and alternative energy sources. Tesla’s production of electric vehicles and solar roof tiles qualify for the US government’s advanced technology vehicle manufacturing credit, which can help reduce the overall tax burden for Musk, as well as for Tesla.
Furthermore, because Tesla and SpaceX are both considered pioneer enterprises in the sectors in which they operate, they both qualify for and take full advantage of the federal research and development tax credit. This credit rewards companies for their innovative efforts and helps to offset the costs of research and development. The ultimate result is encouragement of technological advancements and a significant reduction in overall taxes.
Investment Strategies
Musk also benefits from various investment strategies, such as using qualified retirement accounts, IRAs and HSAs, to help reduce his taxable income. These accounts allow him to invest money tax-free and defer taxes on his capital gains until they are withdrawn. Furthermore, because he is self-employed, he is also able to take advantage of the Solo 401(k), which is used by professionals and entrepreneurs who are their own bosses.
This retirement account allows for higher contributions and deductions than the standard 401(k), yet the best part about the Solo 401(k) is that any investment income earned in the account is tax-free. This helps Musk to not only benefit from reduced taxes but also save for retirement in the most tax-advantaged way.
Tax Shield Strategies
In addition to the strategies already discussed, there are several additional tax-saving strategies that Musk and his advisors utilize in order to reduce his overall tax liability. These strategies, known as tax shields, are methods that allow for the deferral and/or the reduction of taxes. These strategies include but are not limited to the utilization of special limited liability companies, offshore trusts, and Intellect Property transactions.
By employing these tax shields, Musk is able to keep more of his money invested and put more of it towards activities that benefit both himself and the greater good. Additionally, employing these strategies allows Musk to both minimize his risk and stay prepared for a rainy day.
Conclusion
Though it’s clear that Musk pays taxes, understanding how he minimizes them is an interesting topic. In order to reduce his tax bill, Musk takes advantage of many strategies – including stock options, tax credits, charitable giving and tax shields. These strategies allow him to keep more of his money and stay prepared for whatever the future may hold.
