Market & Economy

Redpilling Investors: Introducing a New Subset of Americans to Tax Avoidance

You’ve heard of billionaires stashing their money overseas and other ways wealthy people protect their money from taxation, but most people normally wouldn’t consider going to the same lengths to avoid taxes. If you are one of the lucky ones who started to experiment with investing this year and hit it big, you might be in for a rude awakening come this tax season.

Inflation ‘A Tax on the Middle’

There are many issues that can be pointed out with our current tax system, but for better or for worse it is the system we have and most of the general population goes on without questioning it too much. But what if you take that system and tack on inflation?

Take our current scenario, where we are looking at around 7% inflation (or greater, given historic calculation methods) since last year. For the wealthy, that increased cost of living can generally be ignored. For those living at or below their means, everything costing more has real impacts. Say for the sake of simplicity that someone makes $100,000 a year with roughly equivalent expenses. After 7% inflation, you would need 107K to meet the same standard of living. Further, say their employer was to give them a raise to keep up with inflation, that additional compensation would also be taxed, and possibly at a higher rate than before. The increased income might not make up for the difference in their cost of living. In this way, inflation can be described as a tax on the middle.

Add to that, consider you are one of the many who recently started dabbling in the stock market. Because of the market recovery following the economic lockdown, some of those new investors saw their portfolios perform impressively. If you only just started investing, you might not know how those gains are going to impact your tax obligations come filing time.

The Awakening

Through these somewhat unique economic times, the process described has created a sort of financial redpilling, or waking up to the real truth of how our tax system works. In a manner akin to touching a hot stove for the first time, something that has been a minor part of people’s lives, unworthy of further investigation and understanding, has now shown it can cause tangible harm.

Although some couldn’t articulate what is happening on a debate stage and don’t know the underlying forces at play, they know they are making more money, and it still feels like taxation is now making it harder to pay for everything.

Wading into Unknown Waters

Among those who have done well financially in the past few years, this financial redpilling has led some to reconsider tax avoidance. People who never would normally be considered candidates for creative strategies to avoid taxes are now wading into the waters of complex financial structures to protect their newfound wealth. From attempting to establish partial residence in places without capital gains taxes to setting up complicated trusts, everyday people are stepping into complexity.

At the end of the day, people are waking up to the way they interact with the economy. They can feel the impacts of the forces at play impacting their lives and some are trying to do something about it.

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