Scrolling on your phone or skimming the newspaper headlines at Starbucks, you see them: op-eds calling for the wealthy to pay their share of taxes, or stories about some rich muckety-muck finally getting nabbed by the IRS for tax evasion. The thought of not paying your taxes feels anathema — it’s your civic duty after all. And let’s be real, the thought of getting caught not paying your fair share is terrifying.
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Still, it gets you thinking: How do rich people avoid taxes? You don’t exactly have time to go back to school and take classes in economics or political science, so you take a faster route by asking your old pal ChatGPT to explain it like you’re 12 years old. While ChatGPT is by no means perfect and should always be treated as a jumping-off point for your own research, it does give you a solid start.
The results were, frankly, surprising — and a reminder that headlines don’t always tell the full story.
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1. Capital Gains vs. Ordinary Income
First and foremost, ChatGPT reminds you that, despite those glitzy stories of Real Housewives being apprehended by the IRS (because the Good Taste Police were busy that day), most wealthy people use legal strategies to reduce or defer their tax burdens.
One of the most common ways the rich do this is by earning money through capital gains — income from investments such as stocks, real estate or business sales — rather than wages. Capital gains are often taxed at lower rates than ordinary income (like a salary), which allows the wealthy to hold onto more of their money if those gains are their primary source of income.
2. Tax-Deferred and Tax-Advantaged Accounts
Odds are, you have some of these accounts yourself — and you’re not even getting breakfast at Tiffany’s on a regular basis (unless your streaming record counts). If you’ve got an IRA, a 401(k), a 403(b), or another retirement account — and if you don’t, you should consider one — those investments can grow tax-deferred until you withdraw the money in retirement.
ChatGPT said that “wealthier people may also use Roth IRAs, 529 plans (for education), or health savings accounts (HSAs) for specific tax-advantaged purposes.” These accounts aren’t just for the wealthy, though. In fact, everyone who’s eligible should explore them for their own financial well-being and their family’s future.
This section is a good reminder that ChatGPT can be a useful starting point for research, not a substitute for personalized advice.
3. Trusts and Estate Planning
Trusts and estate planning offer another pathway to reducing tax burdens, at least for now. ChatGPT notes that wealthy people often use “grantor retained annuity trusts (GRATs), dynasty trusts, or charitable remainder trusts to pass on wealth with minimal estate or gift taxes.”
While these tactics can sound (and actually often are) complicated, they’re also commonly used by the ultra-wealthy to preserve and pass down generational wealth. If you’ve got significant assets, this kind of planning is less about loopholes and more about structuring things efficiently and legally.
4. Borrowing Against Assets
Another way rich people reduce their tax burden — and it may not be as glamorous as hopping on a late-night flight to the Caymans — is by borrowing against their assets. What does this mean?
ChatGPT puts it simply: “Instead of selling stocks or properties (which triggers taxes), some wealthy people borrow money using their assets as collateral. This provides cash without realizing taxable income.”
It’s a move that helps them access funds without triggering a taxable event, and it’s one of the reasons wealth can seem so “liquid” at the top, even if technically, it’s not.
5. Offshore Accounts and Tax Havens
Ah yes, now we’re getting into movie villain territory. If you’ve ever watched a corporate thriller or a soap opera set in a high stakes boardroom, you’ve likely heard about offshore accounts.
Technically, using offshore trusts, shell companies, or bank accounts in countries with low or no taxes can be legal — if fully disclosed to the IRS and operated within the law.
However, as ChatGPT points out, these practices are “often associated with aggressive tax avoidance or even evasion (if undisclosed).” That’s a crucial distinction. The legality hinges on transparency. Cross the line, and you’re no longer talking about savvy strategy — you’re talking about fraud.
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Bottom Line
While it may seem like the wealthy are dodging taxes, many of their strategies, like using capital gains, tax-advantaged accounts and trusts, are legal and, in some cases, available to everyone. The difference often comes down to access: they have experts helping them play a complex system to their advantage. Understanding these rules — or hiring someone who does — is the first step to using them yourself.
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This article originally appeared on GOBankingRates.com: I Asked ChatGPT To Explain How Rich People Avoid Taxes Like I’m 12 — Here’s What It Said
