The Former President of the US, Donald Trump, has been accused of not being compliant with federal income taxes. Recently, the New York Times has obtained tax information on Mr Trump. As per the NYT reports, Mr Trump has not paid any income tax for the past 10 years. He had just paid $750 as federal income tax return in 2016 when he got elected as US president. And he paid another $750 in the first year of his presidency.
Although Mr Trump called it a fake report, here are some of the key points to look at:
The key allegation, as per the report
- The former president paid just $ 750 as income tax in both years when he ran for the presidential election and his first year as US president.
- The Former president has tried to lower his taxes by reporting huge losses on business.
- He paid no taxes in 10 of the past 15 years of tax records assessed by the newspaper.
- Although, after the success of The Apprentice TV show, he paid significant taxes—$95 million over 18 years. But later, he got it back as $72.9 million as a federal tax refund. The refund is still under review.
- Trump’s daughter, Ivanka,’s huge consulting fee has reduced the family’s tax bill.
- He has personal liability for hundreds of millions of dollars in loans, mostly due in the next few years
- Trump has claimed a tax deduction on expenses, including $70,000 of hairstyling for television.
Is anything wrong with Trump’s tax return?
The New York Times reports suggest huge tax avoidances by Mr. Trump that may heat conversation, although it is not illegal as per the law. Several wealthy Americans use such loopholes to reduce the tax liability they are legally obligated to pay. According to an IRS source, in 2017, the average federal income tax rate for the highest-earning was 0.001% of the tax filers, or 24.1%. And this is almost equivalent to the net average tax paid by the average American worker in 2019.
If the reports of NYT are to be believed, Mr. Trump has paid $400 million less in combined federal tax returns over the last two years when compared to the average income tax of a similar rich person each year. However, the Trump organization has denied the allegation, and its Chief Officer, Alan Garter, described the newspaper’s claims as inaccurate.
Take away points from Trump’s tax return
Mr. Trump’s tax return has raised questions about illegal tax planning, the bias in tax laws, and conflicts of interest. Here are some points to consider:
Profit and loss netting is very common:
The NYT’s report highlights how Mr Trump used losses from the unprofitable ventures to offset the income from the profitable ones. Thus, this helps reduce the overall tax liability. However, it is by no means illegal; rather, it is an indication of sophisticated tax planning. However, it raises questions over compliance on whether the deductions for generating the losses in business are permitted.
Mr Trump claimed some personal expenses as a business deduction. However, the contribution of these deductions to the overall loss is lower than the depreciation of his real estate assets. Depreciation is the allocation of costs throughout the useful life of assets. Thus, depreciation expense is a tax-deductible expense that is prepaid. Since depreciation is charged each year and not associated with actual cash payments, it is perceived as shrewd planning to reduce taxes without actual spending. But in a real sense, the depreciation is not free, as it represents the actual cost paid by the taxpayers that need financing in some ways.
If expenses exceed your revenue, the owner has three options: self-financing, equity financing, or debt financing. Where debt and equity financing are not feasible, the owner is bound to liquidate their assets. This point is relevant to Mr Trump’s case, where he assumed personal liability as a portion of his business expense. This is nothing but savvy tax planning tactics to maximize the amount of loss that is deductible against income.
