By now, you’ve seen the news. The New York Times managed to get its hands on 18 years’ worth of President Donald Trump’s tax returns. And some of the findings raised a few eyebrows.
The president paid only $750 in taxes the year he took office. And he paid no income taxes at all in 11 of the years reviewed. He also allegedly wrote off $70,000 in haircuts.
I’ll spare you further play-by-play on Trump’s tax returns. Every news outlet in America is already writing about the contents. I’ll let others ponder the president’s acumen (or lack thereof) as a businessman, or his ethics as a taxpayer.
Instead, I want to focus on what Trump’s tax returns might mean for you and me.
Trump’s Tax Returns Show the Power of Real Estate
We know that Trump’s business empire revolves around real estate. And real estate has some of the most advantageous tax laws of any business.
Real estate tends to appreciate over time, at least at the rate of inflation. But property owners are allowed to take “phantom losses” in the form of depreciation. So, even as your property rises in value, you’re able to write off imaginary losses and do so 100% legally, with a blessing from the IRS.
Beyond this, property owners generally don’t have to pay capital gains taxes, even when the properties sell. If you follow the rules and roll the proceeds into another property, you can avoid paying capital gains forever. (You’d want to have a lawyer help you with this because doing it incorrectly means owing taxes.)
If you want a readable primer on playing the real estate game, pick up a copy of Robert Kiyosaki’s Rich Dad, Poor Dad. Kiyosaki has made a fortune selling books. But he made his initial millions buying and selling real estate, while taking advantage of perfectly legal tax loopholes.
The bottom line is that you can amass a nice nest egg for yourself, and pay very little in taxes, by making real estate part of your plan.
Protect Yourself
This is more controversial when it comes to Trump’s tax returns. The president has never personally declared bankruptcy (at least not yet). But several of his projects have failed. And entities tied to Trump have gone belly up.
I’m not interested in defending Trump’s business practices or justifying a lack of responsibility. But Trump’s experiences show the value of asset protection.
Your businesses or investments can take losses or face lawsuits through no fault of your own. To the extent that you can, you should always separate your assets into standalone entities such as LLCs or limited partnerships.
More importantly, you should separate your assets from each other.
Putting your entire portfolio of five rental houses in the same LLC does you no good. If a tenant burns one house down and sues you, creditors could seize every house in that LLC.
Ideally, every asset of any size you own should be placed in its own LLC. Or if you live in a state that supports them, you could create a Series LLC. (I’ll cover the ins and outs of Series LLCs another time.)
Be Careful With Itemized Deductions
In the case of Trump’s tax returns, it’s terrible press. The IRS would audit you or me in a heartbeat for pulling the same stunt.
But you should write off all legitimate business expenses.
And there is nothing philosophically wrong with hiring your children to work for you. Just make sure the salary you pay them is reasonable for the job they’re doing. If it looks like their employment is a scheme to move money out of your name and into theirs in order to pay taxes in a lower bracket, the IRS will probably push back.
And as for the $70,000 in haircuts … it doesn’t sound like a reasonable expense. The key word here is “reasonable.”
The IRS is not the Gestapo. These are, for the most part, reasonable people just trying to do their jobs. They’re not out to get you. But if you put something outrageous on your tax return, you don’t leave them much of a choice. They will audit you.
So, by all means, write off every legitimate business expense you can find. And be willing to push it a little. But don’t put anything on your tax return you wouldn’t feel 100% comfortable defending if you had to.
Also, get ready. If we see a Biden presidency, I think it’s likely that Trump’s tax returns will create momentum for tax reform. But not the kind we’re going to like.
I think the IRS would get a lot more aggressive in the hunt for itemized deduction abuse. So, keep that in mind when preparing your own tax returns.
Money & Markets contributor Charles Sizemore specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business.
Follow Charles on Twitter @CharlesSizemore.