The New York Times obtained more than two decades of President Trump’s tax information, finding that Trump paid $750 in federal income tax in 2016 and 2017. The president called the report “fake news” and said he has been “under audit for a long time.”
Welcome back to patrick boyle on finance today we’re going to look at this weekend’s new york times article on donald trump’s tax returns i’m not going to weigh in on politics there are just a number of interesting issues that arise from the press piece that can be confusing for ordinary taxpayers like you and me the new york times did not publish trump’s actual
Tax returns so we can’t directly analyze them stepping over some of the potential scandals let’s scrutinize for a minute how these complex tax returns work and if the wealthy really are paying almost no taxes at all businesses are able to carry net operating losses both forwards and backwards in time to mitigate their tax bills and in fact an obama tax law change
In 2009 generated a huge windfall for trump we’ll talk about abandonment losses which occur when a business person walks away from a failed business we look at how you can be taxed on any debt forgiveness that you receive and how depreciation drives real benefits for real estate investors yet if you sell a property for a gain you will crystallize taxes on that
Gain on sale at the end we’ll see if we can back out trump’s net worth including the full estimated value of trump’s net equity stake in his real estate businesses from the figures disclosed in the new york times okay so one of the first questions that people are asking is is it illegal for the new york times to have trump’s tax returns well under u.s law no
Irs employee has the right to browse through taxpayer records additionally unauthorized willful disclosure of any return or return information by a federal employee is a felony but those rules apply to federal employees not to private citizens a private citizen may legally have access to a taxpayer’s tax return and that information is no longer protected under
Federal tax laws the new york times refused to show records to a lawyer for the trump organization in order to protect its sources but they have posted an editor’s note stating that the returns were obtained legally the second big question is what can we learn from someone’s tax returns well tax returns won’t tell you what a person’s net worth is but they will
Provide important information about their sources of income their debts their investments their charitable contributions real estate taxes real estate holdings the existence of offshore accounts and some information on their historic investments through tax loss carry forwards and so on we can make some estimates based on that data but they won’t necessarily
Be accurate in terms of forming a full picture of someone’s full net worth but assuming there are taxable income streams off of almost all of the assets held you can piece together a picture of net worth the big headline from the story that people are upset over is the idea that trump only paid 750 dollars in taxes in 2017. how could he have such a low tax bill
There are a few things that could bring that about business losses are known as net operating losses a net operating loss generally occurs when your tax deductions exceed your taxable income if you have a net operating loss in one year but other years have been profitable the tax authorities allow you to use the loss in one year to lower your taxable income and
Reduce your tax burden in another year now there’s nothing unfair or unreasonable about this if a business will say loses a million dollars in its first year and then makes a million dollars the next year overall the entrepreneur has the same amount of money that they started out with and so it wouldn’t be reasonable for them to have to pay taxes on the million
Dollars of gain without first subtracting the prior loss from it under existing tax laws if you have business losses you first carry back the entire amount for a number of years and if you still have a remaining balance you can carry the losses forward you can also opt not to carry back a loss and to only carry it forward for up to 20 years a carry forward
Means that you can apply the loss towards income in future years according to the times trump claimed huge business losses a total of 1.4 billion from his core businesses incurred in 2008 and 2009. before the financial crisis bailout those losses could only be carried back two years which would not have done much for trump obama’s bailout however extended the
Look-back period to four years the time says that this then allowed trump to recover taxes he had paid in prior years when his reality tv show the apprentice was really profitable this resulted in a large refund which we will discuss in a moment but it also reported in him being able to offset future profits with this large loss so where do trump’s main gains
And losses come from the times’s previous reporting on his 1995 income tax return showed that he had close to one billion dollars in losses from his well-known early 1990s business collapse his first 1 billion loss from the 1990s generated a tax deduction that he could use for up to 18 years going forward trump had used this all up by 2005 just as he made the
Majority of his new wealth from the tv show the apprentice the tax returns apparently showed that the apprentice along with various licensing and endorsement deals brought in a total of 427.4 million dollars there’s also some additional income that brings it up to around 600 million in those years but it’s not clear reading the piece it appears there’s some
Buildings that generated some uh profit that they’re they’re lumping in with the apprentice money but we’re seeing 427.4 is the key amount of money that came in from the apprentice now trump will have paid substantial taxes on this income but then in february 2009 trump’s unsuccessful casino business was going bust and trump notified the securities and exchange
Commission that he had determined that his partnership interests are worthless and lack the potential to regain value and that he was hereby abandoning his stake and that’s very specific wording that he will have used and the reason for that is that if a loss is considered an abandonment loss under u.s tax laws then it’s generally deductible as an ordinary loss
Meaning that the full value of the loss can be deductible now if instead it’s considered a sale or an exchange meaning that you got something back maybe only pennies on the dollar that you originally invested in exchange for walking away it’s then treated as a capital loss and those losses are limited to three thousand dollars per year of a tax deduction so
Obviously that’s significantly worse for your taxes going forward now trump reportedly received an equity interest of five 5 in a new company after the conclusion of the bankruptcy of the casino business that he claimed to have abandoned and this is where a lot of the controversy lies in his taxes trump’s abandonment losses for 2009 which then when coupled with
The obama changes to the tax code resulted in a refund which was reportedly around 700 million dollars now the irs does not allow you to both make an abandonment claim as well as maintain a five percent equity stake in a given corporate entity so that’s an important point now in the new york times piece they claim that trump had 287 million dollars of his debt
Cancelled since 2010. they don’t explain if this related to the casino business it seems to be time to after it or where it came from but the irs considers debt that’s been negotiated down or written off to be a form of income because obviously you get some you get benefit from having your debts written off and thus it’s taxable and it would appear that his main
Taxable income over the last probably 20 years has come from this debt cancellation combined with his apprentice tv show related income it would appear that the reason that he was able to avoid taxes on this entire amount relates to his now disputed abandonment loss if trump did receive five percent of the stock in a new company in exchange for abandoning his
Ownership in the casino business this would place his refund and the large write-offs in question now both trump and the new york times do state that trump is undergoing an audit that’s not disputed but by law the irs can’t just examine your tax returns forever there’s sort of an end to these things and there are deadlines and if the irs doesn’t resolve the issue
By the time running out they then have to wrap up the audit at that point they issue their findings and you either pay what they demand or it goes to court so why would this drag out for so long well if a taxpayer thinks that they might be able to reach a settlement they can agree with the irs to extend now you have to agree and the irs has to agree um but you
Can extend and buy a little bit more time you might also do this if you wanted to keep the matter out of court so if you want to negotiate a settlement rather than have it occur in a courtroom where it becomes public record and this could be what’s happening in in this situation now eventually this will all be settled in accordance with the law and if the irs
Does rule against trump he’ll have to pay back the entire amount that’s owed along with all penalties and interest and it’ll be pretty expensive if that is to happen now what about the depreciation on real estate investments because trump is always talking about the benefits of depreciation in reducing his taxes well depreciation is important to all real estate
Investors let’s say for example if you bought a commercial property and it cost you 1 million dollars 20 years ago you’re allowed to depreciate that property over 39 years which means that you can deduct a little bit every year until its useful life is over now when you sell or otherwise transfer depreciated property your sales proceeds may well be much higher
Than your depreciated property value and this means that your tax bill will get driven up depreciation defers the payment of taxes but they are eventually paid when the property is sold or transferred usually it’s paid in the form of capital gains taxes this is once again nothing unusual and this is available to every real estate investor now there’s a lot more
In the new york times piece and they claim that there’s even more to come i’ve really only gone through the details that i think are the most important and kind of the most interesting to my audience here on youtube and i’ve skipped out all the stuff about you know lawyers bills and haircuts and stormy daniels and consulting fees paid to the children if you want
To read all of that i’ve linked to the article in the description below but the big takeaway here i think is that one of the reasons that he hasn’t had to pay an awful lot of income taxes is simply that he hasn’t made an awful lot of income over the period he’s had some big losses from time to time over the last 30 years or so that get written off against the big
Gains that he’s seen and this is totally fair and reasonable and it would not make sense for the government to take a huge cut of profits without allowing a business person to write losses against them his biggest issue appears to be the abandonment claim which the irs is actively investigating and which may incur penalties and interest on the funds should the
Irs be successful one of the problems with reporting on news articles like this is that many people argue that the tax system is rigged to benefit those at the top and that the wealthy are not paying their fair share of taxes when you look at the data of who pays taxes and how much the various income groups pay you’ll see that in 1980 the top 1 percent paid
19 of all taxes in the united states by 2017 the top one percent paid 38.5 of all taxes which is more than twice as much this happened despite the top marginal income tax rate falling from 70 in 1980 to 39.6 by 2017. the chart that you see on your screen right now shows in dark gray the percentage of taxes paid by the bottom 50 in the united states and as you
Can see it’s a small percentage of overall taxes collected and it’s been falling over time so as you can see here the the one percent the top earners do pay their taxes as you would expect to happen now i would argue that it’s just really not good for social cohesion to put forth that big groups of taxpayers are not contributing to the overall system or putting
Money into the pot especially when that is just really obviously not true now one final takeaway from the new york times piece on trump’s taxes comes from wall street cynic on twitter who did some interesting calculations based on the information in the report he explains that since the apprentice trump earns pretty much all of his income from commercial real
Estate assuming that trump tower is fully depreciated by now which is quite reasonable and since golf course land and land improvements cannot be depreciated under irs rules trump’s annual depreciation expense right now could be at most around 20 million dollars from his debt schedule you can then estimate that trump is paying around 40 million dollars in
Annual interest if he’s reporting zero taxes this means that his earnings before taxes is either zero or negative meaning that his net operating income must be below 60 million dollars commercial real estate is valued on what’s called a cap rate basis which is net operating income over property value new york city office buildings are currently trading at a five
To six percent cap rate hotels and resorts are over 10 based on this data in today’s market trump’s overall property portfolio would be worth between 900 million dollars and 1.1 billion dollars the interest that he pays annually implies that he has an approximate debt of 1 billion dollars and that would mean that in today’s market the value of his total assets
May just about cover his debts anyhow that’s the end of the video don’t forget to like and subscribe and i’ll see you again soon bye you
Transcribed from video
Trump Taxes Analyzed & Explained By Patrick Boyle