The WealthAbility Show #132: After 6 years it has finally happened. Now that we have access to Trump’s tax returns, what do they really tell us? Did Trump gain from his 2017 tax changes as much as people expected? In this episode, Tom breaks down Donald Trump’s recently released tax returns to help us discover what Trump’s tax return actually tells us about his financial practices… and what it doesn’t.
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00:00 – Intro
03:46 – What can the audit tell us about Trump’s business?
07:15 – How well were Trump’s tax returns prepared?
08:36 – Did Trump personally benefit from the 2017 tax changes?
12:44 – Could Trump have paid less taxes?
16:39 – What a tax return tell us vs what it doesn’t tell us.
This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.
Welcome to the Wealth Ability Show, where we're always discovering how to make way more money and pay way less tax. Hi. This is Tom Wheelwright, your host, founder, and CEO of Wealth Ability. So Trump's taxes after six years of his political adversaries trying to get them released, finally get released. What do they tell us? Do they tell us what kind of businessman he is? Do they tell us if he's a billionaire? Do they tell us if he's cheating on his taxes? What do they tell us? What don't they tell us? And what can we learn? So today I'm going to be your tax expert since that is my expertise, and walk us through what they do tell us and what they don't tell us. I do believe that tax returns do tell us a lot about somebody. They just don't tell us what the pundits would say that they tell us.
So the big question is why would Trump's political adversaries beginning with Hillary Clinton in the 2016 campaign, why would they go after his tax returns so hard? What did they expect to find? Did they really expect to find that… They said, well, Trump he's a crook. He's losing money on his deals or cheating on his taxes. The question is, what do they expect to find? Well, clearly they didn't find much because after six years of leading up to this, this is like waiting for Christmas for six years and you're anticipating this, and then Christmas day comes and it's a big letdown because there was nothing. And the point is there was never going to be anything.
Any good tax advisor would've told you that what Trump's tax returns were going to tell you was well, that they're going to tell you how much tax he paid. They did tell us that, and they tell us a little bit about how he has his tax returns prepared, and were they clean? Were they sloppy? Did he pay any tax at all? And if he did, did he pay more or less tax than he should have? We can get a little clue into that and we'll talk about that. What it doesn't tell us is whether there's any positive cash flow from his business, whether he made money, whether he has any assets. They really didn't tell us anything about that and they were never going to. And the reason is because if you think about a tax return, what does it say? It really says, “Here's my taxable income, according to the way the tax law tells me to report my income.” It doesn't say, here's my accounting income. Doesn't say, “Here's my cash flow.”
So on Donald Trump's tax returns, we saw that for most years, not all years, but for most years, he paid little or no income tax. A couple of years, he had the seven $50 of alternative minimum tax. A couple of years, he paid some pretty big income tax and he paid a lot of self-employment tax. So from a sure, what did he pay in tax? Here's what I can tell you. I think he paid too much tax. I think with a little bit of planning, he could have eliminated his self-employment tax, which he paid quite a bit of anywhere from 200 to four, $500,000 a year in self-employment tax. That is a really easy fix. It's really easy. When we work with a new client, one of our Wealth Ability clients, one of the very first things we look at is self-employment tax because it's the easiest thing to avoid. It's the easiest thing to deal with.
So the fact that he paid a lot of self-employment tax is makes me wonder, “Okay. So how much tax planning did he actually do?” Now, we do show big losses from his companies, but we don't show where those losses came from. They could have come from depreciation on his real estate. They could have come from cash losses, but because the audit wasn't of the individual businesses, the audit was of his personal tax return. And the individual businesses are held in holding companies, which means you've got a tiered structure. So a holding company means the taxpayer, in this case, Donald Trump owns a company. That company owns another company and that company owns other companies. So until you get to that bottom tier of companies where the operations actually are, you're really not going to know did he make money or lose money?
And those tax returns themselves aren't necessarily going to tell you that. What would tell you that is his financial accounting records. That would be much more obvious or give us much more information than his actual tax records. So here's what we do know. We know that he reported losses. That's not surprising. When Hillary Clinton accused him of not paying taxes and he said, “Well, that's because I'm smart.” I'm just going, no, it's be really because you're a real estate developer and real estate developers rarely pay a lot of tax because of all the depreciation, all the debt that Donald Trump has. I've been saying this for six years, that Donald Trump was never going to show a lot of taxable income. It would be very odd actually for somebody highly invested in real estate to pay high taxes.
What I found to be interesting is that the way the tax returns were prepared, I would have done them differently. I think it does say more about his tax return preparers and maybe more about the amount of planning that they did. For example, and I've talked about this in previous YouTube videos that there's a lot of Schedule Cs. These are sole proprietorships going, “Why does Donald Trump have sole proprietorships?” That makes no sense to me. And then they show a lot of expenses that he paid outside of his businesses for the businesses. Well, why would he do that? So there's some really unusual aspects to this. They don't tell me that there was illegal activity or anything going on. What they tell me is a little more attention could have been paid and he would've paid less self-employment tax and actually would've looked cleaner.
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… than it did. I actually thought it looked, in fact a little sloppy. To be perfectly honest, I thought it was a little sloppy. So I would hope that our network prepares are much cleaner and much tighter than those tax returns that we pay a lot more attention.
One of the challenges I think we have in our industry right now in the CPA tax advisory industry is that there's a lot of just hurry up and get the work out the door. So isn't a lot of attention paid to detail, and some of that is because we have a tight labor market in the CPA profession. A lot of people have left the CPA profession, and some of it is that's what clients are expecting. They're not expecting really tight, clean, well done tax returns. They're just saying, “Well, just get it done. Just get it done and charge me the least amount of money possible.” I'm not saying that it's certainly not the worst tax return I've ever seen, not the best that I've ever seen.
One of the things it did also point out though is that the 2017 Tax Act, which a lot of Donald Trump's political enemies suggested were, well, these are going to benefit Donald Trump personally and the depreciation tax benefits. Well, yeah, the depreciation on real estate, you'd think that wow, that really would dep would benefit him. And in fact, he showed big losses from which we presume came from his real estate, though we don't know from the tax return. What's very interesting to me though is that some of the changes made into the 2017 Tax Act that he signed into law hurt him and they hurt him significantly from a tax standpoint.
So we have his tax return 2015 through 2020. There was a change made in 2017 that did not come into effect until 2021 where we don't have his tax return. But let's assume for a minute because there's been consistency in what his income has shown over those six years. Let's assume that his income in 2021 was similar to 2020. If that were the case where in 2020 he didn't pay much of any tax at all in 2021, he would pay up to $4 million in tax.
Why is that? Because we have a new law called the Excess Business Loss Rule, which is functions like a minimum tax on business owners who have non-business income, and Donald Trump had about 10 to 12 million of interest income every year during those years that we have as tax return. Only $500,000 of that income can be offset by losses from businesses. Well, that means that he could have 20 million of loss from his business, but he'd only be able to use 500,000 of it. Now, those losses do carry forward to succeeding years. But what it does mean is that for 2021, I suspect he had a pretty big tax bill.
Another thing that happened in 2017 was remember that that is the tax act that reduced and almost eliminated the state income tax deduction. Well, in at least one year on Donald Trump's tax returns, he had eight and a half million dollars of state income tax deduction. He lost all of it but $10,000. So we talk about these politicians and okay, well, we don't like them. They're doing things for their own benefit. This is one case where that would not be the case. There were at least two provisions of that law, the state tax deduction elimination and the excess business loss rule that really hurt Donald Trump personally. So I'm not saying that he hasn't lobbied for tax benefits in the past. Actually, we know he has. A lot of people lobbied for tax benefits, and I'm not excusing Donald Trump. I'm not apologizing for him because I don't think there's anything to apologize for.
These tax returns are what they are, and all they tell us is he paid, I think, too much tax. I think he could have paid less, and the 2017 tax law changes, at least for 2021 and possibly going forward into 2022 and beyond will significantly hurt him. And I think that's an interesting commentary. I'm not hearing people talk about that. I'm not hearing people talk about the fact that he really could have reduced his taxes more. So when we look at our taxes, what we want to look for is if you're looking for, let's say, how's my tax return prepared due? Well, I'd get another second opinion. This is an opportunity where Mr. Trump has had many, many second, third, and 45 opinions on his tax returns. There's a lot of people have been talking about him and we get a second opinion. I think it's a great idea. I actually think the committee that reviewed his tax returns for the congressional committee that reviewed them, the tax experts did a pretty good analysis.
So if you look at that analysis, that's probably better. But again, they'll tell you, here's something we should look at. They don't really tell you what happened and when we're looking at our tax returner, we have somebody else say like Wealth Ability that reviews our tax returns. What we ought to be looking for is, okay, how well are my tax returns prepared? Do they look appropriate? Are there mistakes that have been made? Are there planning opportunities that we could take advantage of? Could we pay less self-employment alternative minimum tax? Could we structure our business differently so that we didn't have to have those excess business losses that we weren't going to get because we have big interest income. I think that could be restructured for President Trump. I really do. I think that he wouldn't have to have it done that way. I think those, that interest income is from his companies. So I think that could be restructured.
I think that a tax return will tell us a lot. I look at a tax return. I can pretty much tell you what the tax preparer is like, and I can tell you what the tax payer is like because I can tell you how much attention they pay and how complicated their lives are. Now, Donald Trump's tax returns, as you would expect, extraordinarily complicated. He literally has, it looks like hundreds of companies. So for the IRS to really do an audit of Donald Trump, it would take a very large team of auditors many, many years. So this idea also, by the way, that well Trump's tax return should have been audited, and the IRS didn't do a good job of auditing them, while on its face, that's a fact. The reality is the IRS has been understaffed for many years and for them to have gone in and done a thorough audit, really we still wouldn't have the results by now. It really would take them a very long time. That doesn't mean they shouldn't or couldn't. They certainly can, and who knows, they may be auditing Donald Trump's tax returns.
I'll tell you one other thing, by the way that was interesting is besides the state tax deduction, he lost a lot of charitable contribution deductions. So this is another place where planning would have allowed him to take maybe those charitable deductions in a year where he did pay tax rather than losing them. Because remember, we only have a five-year carry forward for charitable deductions. So if you make a big charitable deduction and then you lose money or you show tax losses for the next four or five years, you could literally lose a tax benefit that you would otherwise have. In Donald Trump's case, it was over 20 million.
So again, I think we can learn that there is some planning to do. I would refer you to the YouTube video I did when I did a very detailed analysis of his 2020 tax return. I very strongly encourage you to go to that. If you really want to see how do you walk through a tax return because I walked through his tax return. But I do think that it's important to remember what a tax return tells us, what it doesn't tell us. My biggest concern is weaponizing tax returns. I don't like it. I don't like it when ProPublica released 3000 tax returns. The IRS still hasn't found the culprit. I didn't like it when the New York Times got a hold of Donald Trump's tax returns. That's an illegal act. Somebody released those that should not have.
I don't like, frankly, that Congress released Donald Trump's tax returns. We can learn from them. I still think that tax returns ought to be private, even a president's tax returns. In part because one of the things we learned from Donald Trump's tax returns is he has a lot of businesses. Well, guess what? There are other owners of those businesses, and should they be subject to the same scrutiny as the President of the United States? That's a question I'm not going to answer. It's not. It's a question for somebody else to answer. You want to answer it? That's up to you.
What I learned from Donald Trump's tax returns is, and I think he could have paid a lot less tax. I think he did a lot better planning. I think he probably could have avoided those big taxes that looked like they were probably going to hit in 2021. Maybe he did. We don't know because we don't have 2021 tax returns. I do think that it's very clear that the 2017 tax law changes didn't necessarily help Donald Trump. There were parts that did, parts that hurt him. So we can know that much about it. To me, it's just a good instruction. We ought to learn about, okay, what should we be looking for a tax return? What should we be looking for? A tax advisor? We do want tax advisors who plan and then execute well in the tax return. And when we do, I think we're going to pay a whole lot more money and a whole lot less tax. Thanks for listening.
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