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Do Trump's tax-avoiding tactics cross the line?

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Aggressive tax strategies, questionable deductions and mountains of debt: These are just a few of the revelations that came to light in a recent New York Times exposé of Trump's tax records. The Times obtained two decades of tax returns from a protected source. Trump has long put off releasing the records, claiming they're wrapped up in an IRS audit. (The audit, while still ongoing, doesn't prevent him from releasing the returns.)

The shocking numbers

The returns reflect that Trump paid zero dollars in federal income taxes for 10 of the last 15 years.

From 2000 to 2018, Trump netted over $600 million from The Apprentice and related licensing deals. He earned an additional $176 million from various real estate investments. And since taking office, he's raked in more than $74 million in foreign revenue.

Fifty years ago, President Nixon spurred national uproar by paying only $792 in federal taxes on roughly $200,000 in income. Trump, according to financial disclosures required for his presidency, earned more than $430 million. Yet he paid only $750 in income taxes for each year of 2016 and 2017.

How did he do it?

Depreciation

Trump leveraged his status as a real estate professional to take advantage of numerous tax breaks. His biggest write-offs involved real estate depreciation.

Depreciation refers to an asset's loss of value over time. Taxpayers can claim those losses over multiple years to reduce or offset their income. On paper, it looks like they're bleeding money. But as a noncash deduction, depreciation doesn't reflect negative cash flow. On the contrary, depreciated properties are often cash-flowing in the positive while appreciating. When the taxpayer realizes that gain by selling the property, they can again avoid taxes by rolling it into a 1031 exchange (or paying capital gains taxes at a lower rate).

It's a common strategy among real estate investors. And Trump is far from the only investor who pays zero dollars in federal income taxes despite earning millions. As he famously said in the 2016 presidential debates, "I love depreciation."

Accelerated depreciation

Depending on the type of asset involved, depreciation schedules range from 5 to 39 years. Investors can take advantage of those varying schedules through a tax-planning strategy called cost-segregation analysis. It works like this: An investor buys a property - say, a hotel. Various components of that property can be depreciated at different rates. Some qualify for accelerated depreciation over 5, 7 or 15 years. By identifying those components, investors can wipe out more income in the short-term by claiming massive depreciation.

Trump's son-in-law and adviser, Jared Kushner, has employed similar strategies. Thanks to depreciation write-offs, he paid minimal federal income taxes even while his net worth skyrocketed to an estimated $324 million.

Carryovers

Another tool Trump relied on to reduce his taxes? Carrying over losses. If a taxpayer's losses exceed their income in any given year, the tax code allows them to carry over the "unused" losses to reduce income in future years, with some limitations.

Trump has had no shortage of losses: more than $315 million on golf courses and $55 million on his D.C. hotel (within two years of opening it). From an earlier period of tax records - 1985 to '94 - Trump reported more losses than almost any other single taxpayer. In 1995 alone, after breaking ground on Trump International Tower & Hotel in New York City, Trump claimed losses totaling $915 million (much of which would carry over to offset his income in the following years).

Questionable strategies

While depreciating assets and carrying over losses are within the law, Trump's returns contain questionable deductions. They include:

  • $70,000 for a hairstylist: Trump's signature flaxen hair doesn't come cheap. For several years while starring in The Apprentice, Trump claimed massive deductions for hair and makeup. These expenses were arguably personal in nature - and therefore not deductible as business expenses. In any event, Trump was likely reimbursed by the network, which would mean he couldn't turn around and deduct them.
  • $750,000 in "consulting fees" to Ivanka: Trump's organization paid his daughter a pretty penny for "consulting fees" - treating her as an independent contractor, even though she was already employed by his real estate company. Many experts consider this a dubious move to avoid payroll taxes and skirt estate and gift taxes. Anytime an organization forks out large sums of "consulting fees" to a family member, it invites scrutiny from the IRS.
  • $21 million for a conservation easement: Trump donated land surrounding his family's New York countryside estate to a conservancy. Thanks to this "charitable deduction," he gained a natural buffer around his mansion along with a $21 million tax break. He's made similar "donations" of land surrounding his golf courses, granting conservation easements and taking massive charitable deductions. The New York Attorney General's Office is investigating some of those deals for inflated appraisals.
  • Write-offs for the family mansion: The returns treat the family's Westchester County mansion as an investment property. However, there's strong evidence - including The Trump Organization's own website - that it's actually a personal retreat for the family.

In addition to the eyebrow-raising write-offs, Trump's returns also reflect hundreds of millions in debt. Trump appears to have relied on an aggressive (and ethically questionable) strategy that involves taking out vast sums of debt, racking up massive losses, renegotiating the debt to avoid paying it all back and - here's the kicker - failing to report the forgiven debt as income.

The controversial $72.9 million refund

Trump's defenders are quick to point out that he has paid hundreds of millions of taxes over the years - just not in income taxes. Certainly, his organization has forked over significant sums in payroll taxes, property taxes and the like - as any property owner and employer must. No shocker there.

Trump did also pay alternative minimum taxes - a federal safeguard that prevents the ultra-wealthy from dodging taxes entirely - totaling $95 million. Those payments were significantly offset, however, by the $72.9 million refund he claimed in 2010. That refund has been mired in an ongoing IRS audit.

To obtain the refund, Trump claimed he abandoned his interest in a failed Atlantic City casino. Under the tax code, he can't have retained any interest in the venture. But it appears that he retained a five-percent stake in the casino's new entity. If the audit goes against him, Trump could owe upward of $100 million.

A broken system that favors the ultra-wealthy

Trump's returns exemplify a major problem with our federal income tax code: the ample opportunities for wealthy taxpayers to avoid paying taxes. The greater the wealth, the more resources available to game the system, exploiting every loophole to the tune of hundreds of millions in averted tax liabilities.

There's an entire industry devoted to doing just that. Wealth management advisers, tax planners, accountants and other financial professionals are obligated to help their clients protect every penny to the furthest reaches that the law allows.

When you're a private citizen, it's one thing to claim questionable deductions and push the limits in gray areas of the tax code. When you're the president - or an aspiring president - however, it's quite another.

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