How billionaires like Jeff Bezos and Elon Musk avoid paying federal income tax while increasing their net worth by billions

• Amazon CEO Jeff Bezos didn't pay any income taxes for at least two years between 2006 and 2018, ProPublica reported.
• Tesla CEO Elon Musk also skipped paying federal income taxes in 2018, according to the report.
• Billionaires are able to circumvent federal income taxes through legal financial manipulation.

In 2007, and again in 2011, billionaire Amazon CEO Jeff Bezos reportedly paid nothing in federal income taxes. In 2018, billionaire Tesla CEO Elon Musk reportedly did the same thing.

That's according to confidential tax documents filed with the Internal Revenue Service obtained by ProPublica, which were revealed in a bombshell new report on some of the world's wealthiest people.

Bezos is currently listed by Forbes as the richest person in the world, with a net worth of $188.8 billion. Musk isn't far behind at number two on the Forbes list, with a net worth of $153.3 billion.

How do men with such dramatically high net worths avoid paying federal income tax?

Billionaires like Jeff Bezos and Elon Musk derive little wealth from their annual income. Instead, much of their net worth is tied to stock holdings.

Bezos, for example, owns a 10.3% stake in Amazon that's valued at about $170 billion.

The majority of Bezos' net worth - $170 billion - is tied to Amazon stock, which fluctuates regularly and has even left the billionaire jockeying for the world's wealthiest title with Tesla CEO Elon Musk at times. At least $19 billion of Bezos' wealth is not tied to his stake in Amazon.

Bezos can skip paying taxes on his accumulated wealth from the Amazon stock because stock gains aren't taxed until they are realized by selling off the stock: Since those stocks represent value, but cannot be used as tender, they aren't counted as "income" - even if they appreciate in value tremendously, like those of Amazon and Tesla.

As a result, though Bezos' net worth increased by a reported $127 billion between 2006 and 2018, he only reported an income of $6.5 billion for those 12 years, according to ProPublica, resulting in a tax bill of around $1.4 billion.

That puts his federal income tax rate at about 21%, but his reported income doesn't account for the massive increase in his net worth tied to stock ownership.

If you account for the $127 billion increase to his net worth that came from stocks appreciating in value over time, that $1.4 billion in federal income taxes accounts for just over 1%.

Moreover, Bezos and other stock-holding billionaires are able to turn those stocks into usable cash without having to sell: By borrowing money against their stock holdings, they're able to lock in a lower loan interest rate than what they would pay through capital gains taxes that are applied after a stock is sold.

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