How the tax code allowed President Trump to pay $ 750 in taxes

  • On Sunday evening, the New York Times reported that President Donald Trump paid just $ 750 in federal income taxes in 2016 and 2017.
  • The tax code allows this: The loss carryforward provision allows business owners to waive tax payable in future years by carrying losses from previous years.
  • Regular investors can do something similar: If you sell a stock or mutual fund at a loss, you can use the amount of the loss to write off any capital gains taxes you may owe.
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Sunday night, the New York Times released an explosive report alleging that President Donald Trump paid only $ 750 federal income tax in 2016 and the same amount in 2017. The report goes on to say that he paid no federal income tax during 10 of the previous 15 years.

How is it possible? How could a man worth over $ 2 billion (according to some sources) pay so few taxes for so many years?

Well, one answer is to lose money. A lot of money.

How the tax code helps Trump cut his tax bill

The loss carryforward provision in the tax code allows an individual to spread current losses over subsequent years to offset future tax bills. Here is an overview of how it works:

Many companies are experiencing a net operating loss (also known as NOL) for the year – this is common for startups and other capital-intensive industries like real estate and agriculture. When a business is unprofitable and loses money, it is not forced to pay taxes.

If that business makes a profit the following year, then it is subject to tax. However, if the company had a NOL the previous year, it is able to carry forward this loss to offset its tax bill. If the previous loss is greater than the tax invoice, the business not pay taxes that year.

Before Tax Cuts and Jobs Act 2017, this deferral tax provision could only be extended for 20 years. Today, it can be used indefinitely.

Large businesses use this tax provision all the time

This is an extremely common tax avoidance solution that businesses use, according to Ebong Eka, CPA. For example, Amazon used the deferral tax provision in addition to other tax credits to offset more than $ 11 billion in profits – a move that has drawn criticism from Senator Bernie Sanders and Representative Alexandra Ocasio-Cortez in 2019.

For his first 17 quarters, Amazon has always operated at a loss, losing $ 2.8 billion during that time. Amazon’s strategy was to devote more funds to growing the business and gaining market share. And Amazon’s strategy took it from being an online bookseller to the e-commerce giant it is today.

Ordinary people can use a similar tax rule

The average investor can also use a similar tax rule. The IRS allows a capital loss carryforward, which allows an investor to sell a stock or mutual fund at a loss and then use it to compensate

capital gains

. Currently, the IRS limits this provision to $ 3,000 ($ 1,500 for separate filing) to deduct from your income taxes; losses beyond this amount can be carried forward indefinitely.

Here’s an example: If you sell a stock at a loss of $ 5,000, you can deduct $ 3,000 from your ordinary income. If your income is $ 50,000, you would be taxed on $ 47,000 and the remaining loss of $ 2,000 could be carried over to the following year.

In the case of President Trump, the mechanics are similar. The Times reported that Trump lost $ 47.4 million in 2018. In 2016, the Times got part of Trump’s 1995 taxes in which he reported losses of $ 915.7 million – a loss that would have allowed him to offset his income tax for decades. (Note: His finances probably improved in 2005 when he reportedly started paying taxes again, according to journalist David Cay Johnson.)

But these aren’t the only areas of tax law Trump may have tapped into to reduce his tax liability. “It takes advantage of the areas of the tax code that give you the most bang for your buck: business ownership and real estate investing,” said Camari Ellis, Founder of the Philly Tax Team.

Trump may also have benefited from the depreciation of one of the investment properties he owned. Like Trump said in 2016 during a presidential debate, “I have a write-off, a lot of the depreciation, which is a wonderful charge. I love the depreciation.”

“All assets have a ‘shelf life’ or a useful period of time,” said Courtney Richardson, a practicing lawyer and founder of Ivy Investor. “Depreciation allows business owners to reduce the value of this asset over a period of time to primarily account for wear and tear.”

Real estate investors big and small can take advantage of this tax break, according to Ellis. “Your average person only thinks about taxes during tax season. The people who get the most bang for their buck on taxes plan and strategize throughout the year. “

Assuming the losses were properly accounted for, Trump’s tax bill accurately reflects his company’s performance over the past several years – which, frankly, may not have been as perfect as Trump would like the public to think. .

Kevin L. Matthews II is a # 1 bestselling author and former financial advisor. In 2017, he was named one of Investopedia’s Top 100 Most Influential Financial Advisors.

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