Every Presidential candidate since 1976 has released their tax returns to the public, everyone except for Donald Trump. The New York Times was able to obtain years of Trump’s tax returns, and on September 27th, 2020, launched the following headline across the web: LONG-CONCEALED RECORDS SHOW TRUMP’S CHRONIC LOSSES AND YEARS OF TAX AVOIDANCE
While many poke fun at his alleged $70,000 hair styling expenses while he starred on the hit reality tv show, The Apprentice, others wonder at the legality of Trump’s tax avoidance. After all, he is under audit by the IRS.
The US Tax System
Almost everyone with an income has likely paid, or will pay, taxes. The current US tax system is progressive, which means, the more a person earns, the higher tax rate they will pay. Below is an example of the 2020 federal brackets for married couples filing jointly below:
|Tax rate||Taxable income bracket||Tax owed|
|10%||$0 to $19,750||10% of taxable income|
|12%||$19,751 to $80,250||$1,975 plus 12% of the amount over $19,750|
|22%||$80,251 to $171,050||$9,235 plus 22% of the amount over $80,250|
|24%||$171,051 to $326,600||$29,211 plus 24% of the amount over $171,050|
|32%||$326,601 to $414,700||$66,543 plus 32% of the amount over $326,600|
|35%||$414,701 to $622,050||$94,735 plus 35% of the amount over $414,700|
|37%||$622,051 or more||$167,307.50 plus 37% of the amount over $622,050|
If Trump is worth $2.5 billion, how on earth did he get away with paying almost no federal taxes? The answer is quite simple as shown in the chart above: one only pays tax on income, not on net worth. The report from the New York Times indicates despite Trump’s business empire accruing income, there are also huge amounts of loss. Does, or doesn’t the IRS tax all income? The short answer is no, and that’s where tax avoidance comes in.
What is Tax Avoidance?
The IRS defines tax avoidance as, “An action taken to lessen tax liability and maximize after-tax income.” Therefore, tax avoidance is legal, and the IRS and congress are well aware of it. The tax system is viewed by some as a mere game with a complicated rule book hundreds of pages long. Every year wealthy individuals and family offices consult with CPAs and Tax attorneys to help create strategies from this rule book to significantly save on taxes. Tax saving strategies aren’t only reserved for the ultra-affluent, although they tend to be the group who utilize it more often than the average person.
What is Tax Evasion?
In addition to tax avoidance, there is something called tax evasion, which is considered illegal. The IRS defines tax evasion as, “The failure to pay or a deliberate underpayment of taxes” People found guilty of tax evasion have attempted to hide a portion, or all of their income from the government. This could be done by not reporting all sources of income, such as gambling winnings, money laundering and receiving payments under the table. Such practices sharply contrast with tax avoidance strategies, which consist of donating appreciated stocks to charities or starting up a second business with the expectation it will produce an initial loss. To be prudent, such strategies require one to seek out, and closely follow expert advice.
So, is President Trump’s tax avoidance a crime?
As far as President Trump’s returns under audit are concerned, we simply don’t have enough information yet to know if it raises to the level of tax evasion, or is simply permitted and legal avoidance.
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