Description:

The N.Y. Times reports that Donald Trump recently paid $750 in federal taxes. Discover how it’s possible for anyone to follow the tax code, make significant income and legally pay little or no taxes.

SHOW NOTES:

01:08 – Why Is The Tax Code So Widely Misunderstood?

01:45 – Is Not Paying Taxes Unpatriotic?

03:12 – What Are The Different Tax Deductions?

10:34 – How Will The Government Share Risk?

11:00 – How Could Trump Use Business Losses To Lower His Taxes?

14:47 – How Can Anybody Use The Tax Code To Lower Taxes?

21:04 – How Is Real Estate Investing Particularly Useful For Lowering Taxes?

25:54 – How Can Carrying Losses Lower Taxes?

Transcript

Announcer:

This is the WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

 

Tom Wheelwright:

Welcome to the WealthAbility® Show where we’re always discovering how to make way more money and pay way less tax, which is the subject of our show today. So President Trump’s opponents and the New York Times, especially are saying that Trump paid very little tax and inferring that he’s a tax cheat because he paid very little tax. So today you’re going to discover how the government incentivizes people to make a lot of money and pay a very little tax.

 

 

I can’t believe how great it is that we’re talking about this. Because this is one of the most misunderstood economic topics in the world, particularly among the general population. Now, if you’ve listened to the WealthAbility® Show before, you know that the whole premise of our show is way more money and way less taxes. So today I’m going to actually show you how Trump could pay very little tax and more importantly, how you could pay very little tax.

 

 

So let’s start with the question that I get right from the beginning is not paying high taxes, is that unpatriotic? Okay? Is it unpatriotic? And that is a question that people ask. People go, “Well, wait a minute. Vice President Biden paid hundreds of thousands of dollars in tax and Kamala Harris, Senator Harris and her husband paid millions of dollars in tax.” Is it really legit or could it be legit? We don’t know whether it’s legit, but could it be legit that Trump paid little or no tax and did it legitimately? Well, here’s what I want to explain to you today.

 

 

So the tax law, most people think of the tax law as a way to raise revenue and that’s what they think. It’s really simple. You get income, the income comes in and then out goes tax. That’s what most people believe. And most people, frankly, 80% of the public, that’s what they experience. Their money comes in, it’s withheld, at the end of the year they file a simple tax return and they get money back.

 

 

Most people also, however, know that at least in some respects, this is a net income tax. Meaning that there are certain deductions that everybody gets. For example, everybody gets what’s called a standard deduction. And the standard deduction is right now, it’s $12,000 per person. So $12,000 is a good portion of money. That means that the first $12,000 you earn is non-taxable. That’s a $12,000 deduction. Most people also know that your mortgage interest and at least part of your taxes are deductible, that charitable contributions are deductible.

 

 

Have you ever asked yourself why? Why are these things deductible and other things not? For example, why does a renter not get a deduction for rent and a homeowner get a deduction for interest in taxes on their home? Well, that doesn’t seem fair. Why does somebody who donates money to a charity get a tax deduction, but somebody who gives money to their child or some other individual doesn’t get a tax deduction. Why is that? How is that even possible? Why is it that somebody sends their child to college, they get a tax credit, but children that have maybe other needs and they don’t go to college they don’t get a tax credit for that.

 

 

Why is that? Well, because the tax law is not just a way to raise revenue for the federal government. The tax law is used to for multiple purposes to incentivize certain activities. And those activities include the following: homeownership. Homeownership has long been a public policy encouraging people to own homes. That’s a policy. And so a way to encourage that is say, “Look, if you own a home, we’re going to give you a tax deduction.” So that’s an incentive own a home.

 

 

Social. So social benefits are things like charity. Okay? So charity is an example of a social benefit. The government has long said, Look, if you have an organized charity, a public charity and we qualify it as it’s operating correctly. And we’re going to monitor it because we’re going to require that charity to file reports and tax returns every single year.” If you donate to, to that public charity, you get a tax deduction and the charity doesn’t have to pick up the income. This is a huge social cause that the government provides.

 

 

Now can any anybody form a public charity? Yes. Anybody can. Can all public charities, does it matter whether you donate $10 or donate a thousand dollars or a million dollars? No, it really doesn’t. You get a tax deduction either way. So the amount of money doesn’t matter. What matters is that the government has said, “We want you to do this and we’ll give you an incentive to do it.”

 

 

Here’s another one. Social is education. They provide tax benefits for education. You send your child to school, we’ll give you a tax benefit. You have a 529 plan, we’ll give you a tax benefit. So this is another social. Now there’s also economic incentives. Now economic incentives include if you start a business, you get to deduct your expenses in that business. Now, if you’re spending money personally, so for example, good example right now is home office. Almost everybody is now in a home office. Employee, self-employed, everybody.

 

 

The government says, “If you own a business, that home office is deductible. If you’re an employee, that home office is not.” What is that? That’s an incentive for business. So they’re saying, “Look, the government believes whether you believe it or not.” I’m just explaining the policy here. Okay, not judging it. We can save that for another time. In this case, the government is saying, “We like people to start businesses.” And why would they do that? Well, for a couple of reasons.

 

 

One is what they’d like to do is they’d like to create jobs. So jobs are one benefit that come out of that. Now, if they create jobs, let’s give an example. Let’s say, let’s take President Trump. And let’s say, President Trump has a business, which he has lots of them, according to New York Times over 500. Okay? So he has a business and he has employees. So if he earns $10,000 and he pays an employee, $5,000, he only pays tax on the net of that. Okay?

 

 

So he won’t pay tax on the full $10,000 and why doesn’t he? Well, because the employee is going to pay tax on the other 5,000. So they’re just splitting up who pays tax. Now, this is always true with a business expense, because let’s say that your business expense is you have business travel. Okay? So you pay the airline. Well, the airline pays tax on that income and then you don’t pay tax on that income. So it nets out that the tax does get paid. Okay? In most cases, all right?

 

 

Now businesses is one of those economic benefits. A couple of really well-known examples of this are Jeff Bezos and Elon Musk. Okay> they both started companies. One started Amazon and the other Tesla. Neither one of them pay tax for many, many years. Why is that? Well, because their expenses were greater than their income. So if they had $10,000 of income, they might’ve had $25,000 of expenses. How did they do that? They had investors. So the investors put money into the company. Okay? Or they could have put money into the company. And a lot of small business owners, they’re putting their own money into the company.

 

 

So they put money into the company. There’s no deduction for putting that money into the company. And then the money gets, let’s say you earn 10,000, you spend 25,000. That means $15,000 of that money that you put into the company is gone. Okay? It’s gone. You risked that money and so the government says, “Look, if you take risk,” this is a big key to how the tax law works. “If you take risk, the government will share that risk.” And the way they share it is, look, let’s say that you’re in a 30% tax bracket. So you have other income. Let’s say you have income from a job because you also have a job as well as your business and the money goes into the business. You lose money.

 

 

So let’s take President Trump as an example. So President Trump made money on the Apprentice apparently close to half a billion dollars. I mean, unbelievable. Good job. He made that money and the New York Times reported that what he did with that money was he put it into his golf course businesses. Okay? And then the golf course businesses supposedly lost money. Now we’re going to get to that one because there’s a special incentive for real estate and manufacturing that doesn’t apply to anybody else. Okay? So there are some special incentives in there. So we’ll get to those, but what’s going on is, is they’re sharing the rest.

 

 

They say, “Look, if you put your money in,” so you take that money. So Donald Trump earns $400 million and let’s say he spends and normally he would pay tax. How much tax would he pay? Let’s say he would pay, let’s say he’s in a 40% tax bracket. So that would mean that he would normally pay how much on that? $160 million in tax. But then what he does is he takes that money and he puts that money into his golf courses. So he puts them back into businesses.

 

 

So he let’s say that money’s gone. He spends the whole 400 million. That 400 million. Then he takes the Apprentice money, he puts into the golf course and he gets a $400 million deduction. So if you take 40% of that, that’s a $160 million of tax benefit. So you wonder, “How could he possibly have a $72 million refund?” Well, this is how. Because 70 million actually means that he paid some tax. Because if he paid 160 million and he just got a refund a 70 million, that means net, he paid $90 million on that money. That’s what that means. Okay?

 

 

So the government’s sharing that risk of the golf courses. Now you go, “That’s not fair.” Okay. Again, we’ll talk about whether what’s good policy another time. I’ll get back to this in a second.

 

 

Hey, if you like financial education, the way I do, you’re going to love Buck Joffrey’s podcast. Buck’s a friend of mine. He’s a client of mine. He’s a former board certified surgeon and he’s turned into a real estate professional. So he has this podcast that is geared towards high paid professionals. That’s who he’s geared towards. So if you’re a high paid professional and you’re going, “Look, I’d like to do something different with my money than what I’m doing. I’d like to get financial educated. I’d like to take control of my money and my life and my taxes.” I would love to recommend Buck Joffrey’s podcast, which is called Wealth Formula Podcast with Buck Joffrey. I hope you joined Buck on this adventure of a lifetime.

 

 

I learned a long time ago that rich people don’t pay tax. Okay? I was in a big national accounting firm, Ernst & Young. And we worked with a lot of really wealthy people and guess what? They paid very little tax. Why was that? And so I learned I’m a total student of the tax law. I love learning the tax law. And what I’ve learned over the years is and this is why I wrote my book. Tax-Free Wealth is that anybody can do this. As long as you understand how the tax law works. As long as you understand that, for one thing, there are economic incentives. Just like there’s an incentive to buy a house. Okay? And the government shares the cost of that house, don’t they?

 

 

The government shares the cost of that house, because if you have a $10,000 of interest in a year, and you’re in a 30% tax bracket, you get a $3,000 tax benefit. Meaning the government paid $3,000 for that mortgage and you paid 7,000. Because you would have otherwise paid $10,000 of tax on your income. You would have otherwise paid 10,000 or excuse me, on the mortgage. You paid 10,000, but you got 3000 back. So you really as a net only paid $7,000. You pay 10,000 to the mortgage company. You got $3,000 back from the government. So net you paid $7,000. That’s exactly the way it works from an economic stimulus as well.

 

 

Now, business is one aspect of the stimulus of the economic stimulus. Another economic stimulus that the government encourages. And I will tell you, by the way, all governments do this. I’ve traveled all over the world. Speaking in many, many, many countries, all six continents, not Antarctica, but six continents I’ve spoken on. Every single country that has a developed income tax whether it’s South America, whether it’s South Africa, whether it’s Europe or Russia or China or Australia, doesn’t matter. They all do the same thing. Okay?

 

 

So understand this is not an American issue. I want to be really clear. This is not unique to America. Now the details, some of the details are unique, but this is common tax policy around the world. What the government learned many years ago was that people hate paying tax. Okay? I mean, even the government figured that one out. So what they said was is, “Look, if you hate paying tax so much, we give you a little bit of a tax break, maybe you will do what we want you to do.”

 

 

Well, they want you to create jobs. Okay? In this case, President Trump’s business is real estate and real estate in all countries is highly favored. Never more so than in this country. Since 2017, I don’t know, maybe our president is a real estate developer. But real estate, seriously real estate all over the world. It’s not just here. Here it’s even more favored since 2017. In 1986, Ronald Reagan and his big tax bill actually decimated real estate. And we’ll talk about that on another show because that’s a policy issue, but really the impact of what he did in taking away the tax benefits from real estate the Congress did and Reagan did back then was to actually cause the biggest real estate crash in modern history.

 

 

So we’ll talk about that again. That’s a policy issue in a later show. The fact is real estate is a very preferred form of investment. The government doesn’t want to build houses. It doesn’t want to build housing projects. It doesn’t want to build commercial projects. The government does not want to be in the real estate industry. So the government gives tax benefits and the big tax benefit, now there are credits and all sorts of things.

 

 

They’re a business so they get all the business deductions that everybody else gets. But a really big on in my book Tax-Free Wealth, I call this the magic is depreciation. And depreciation, let me make it really simple. Let’s say you buy a car. Okay? So depreciation applies to other things besides real estate. You buy a car, let’s say a car lasts five years. So a car last five years. So when you buy it, let’s say you pay $20,000 for that car. So you pay $20,000 for a car and it’s going to wear out over five years.

 

 

Well, because it doesn’t wear out immediately, typically what you get if that car is used in your business. Okay? Now again, it’s incentive to use a car in business instead of personally. If you use that car in business, what happens? Well, if you use that car in business, then you get a deduction for depreciation. So let’s say that’s $20,000 divided by five would be $4,000 a year. And that’s called a depreciation deduction. Now that’s true even though is the car worthless after five years? No, of course not. It’s worth more than 20. At the end of five years, it may be only worth $10,000, but it’s still worth the money.

 

 

So the government said, “Look, we’re going to give you incentive to buy cars in your business.” I mean, there are lots of fleets. Fleets buy the most cars. It’s not the individuals that buy lots of cars. It’s the corporate fleets. They buy thousands and thousands and millions of cars. And so they give this tax deduction to encourage that activity. Now, real, estate’s a little different because real estate doesn’t wear out quite like a car does.

 

 

There are buildings that have been around for hundreds of years. Real estate typically gets a depreciation. Let’s say you spend a $100,000 on a building, it typically gets depreciated over time let’s say 40 years. And so that means that $2,500 a year is the deduction. Now at the end of 40 years, that $100,000 property may now be worth $500,000. So it actually may have gone up in value. Real estate has a tendency to do that. I mean, there’s ups and downs, but frequently you’ll buy a house. For example, buy a house. People buy houses all the time, thinking this is my nest egg because houses go up in price and sometimes they even go up in value. Okay?

 

 

So if it goes up, then that means, “wow, it’s worth more even though I’m getting a deduction.” And so the government is sharing the cost of this building, even though it’s going up in value. Why is that? Because we’ll eventually pay tax on that, maybe. Okay? Maybe. Now I show you in Tax-Free Wealth how to not pay tax on that. Okay? So you can actually never pay tax on your real estate. That is unique to real estate. It is unique to real estate. And we actually have a term we use, we call it buy, borrow, die. So that’s another discussion, another time. In fact, we’ve done a podcast on that.

 

 

We’d done podcasts on all different aspects of these incentives. So go back, listen to all the podcasts. It’s free. So if you want to really learn how this works, listen to all the podcasts WealthAbility® Show and read Tax-Free Wealth. It’s pretty simple, but this is why President Trump would not pay tax. We need to add one thing here. He would get this $2,500 a year multiplied by lots of zeros. Here’s what President Trump does. He adds something we call debt. Meaning that if he buys a building for a $100,000, he didn’t put a $100,000 of his money into that. Just like when you buy a house, if you buy a house for a $100,000, you don’t put a 100,000. You typically don’t pay a $100,000 of your cash.

 

 

Typically, you’re going to pay $20,000 and the bank’s going to give you $80,000. Now in business, when that happens, who gets the depreciation deduction on the amount that was funded by the bank? Does the bank get it or does the investor get it? And the answer is the investor gets it. So what happens with debt and this is important for President Trump’s situation is what happens with debt is that debt actually increases his tax deductions. So he might’ve put in a $100,000 himself, but the bank might have added 400,000. So now he has 500,000.

 

 

Let’s do this. That’s also divided by 40 and that is now $10,000 a year. So in total, now it’s $12,500 a year for a deduction for the 100,000 that President Trump put into the deal. Now on top of that, the tax laws actually don’t make you take 40 years. They do for some parts of the building, but for a lot of the building, typically about 30% of the building prior to 2017 was deducted over somewhere between five and 10 years. Okay? So that’s even faster. And if you keep investing, then you keep getting new depreciation.

 

 

And that’s what President Trump seems to have done is that he kept investing his money from the Apprentice into golf courses, into other real estate developments. So he would have continued to get the business expenses from those golf courses, but also the depreciation from those golf courses. If the New York Times is accurate that he paid very little tax, most likely, this is how he would have done it. Now, we don’t know whether he took shortcuts. No comment here. Okay? We don’t know that. Okay? What we do know is, is that we do know in the New York Times has said this is that President Trump took the money from the Apprentice and put it into his golf course developments.

 

 

If that’s what happens and I’m going to trust the New York Times on that, then he would have gotten deductions to largely offset the income, which is why he claimed he got the … Wow, why did he get the refund? Because he actually took those losses. So this wasn’t all in the same year. He didn’t earn all the money in the Apprentice and do his golf course development all in the same year. You earn the money on the Apprentice and then later in subsequent years put money in the golf courses. So what did he do? He actually filed a refund claim and was able to carry back those losses two years of the Apprentice. Okay?

 

 

This was actually a change in the law during the economic recovery of the 2008, ’09, ’10, there was an extension of the carry back. The carry back it was two years and they extended it longer than that. Right now, for example, under the CARES Act, they extended, they made the carry back five years. So this is a current law. By the way, the CARES Act did this currently to allow you to take losses from 2018, ’19 or ’20 back five years and get a refund. So here’s the point. Whether you’re in real estate, business, by the way, energy. Energy policy is largely driven by the tax law/.

 

 

You get solar energy credits for putting solar on your house. You get a credit for buying an electric car. Okay? So those are energy incentives. You get a big deduction, basically a 100% for investing in an oil well. Investing in coal mines you get big deductions. So there are big deductions for energy because that is what the government has said. That is the government policy. Again, we’re not talking about is that good or bad policy? We’ll do that in a later show. In this show, I just want you to understand, is it possible that President Trump paid no taxes legally? And the answer is it’s very possible.

 

 

In fact, I’ve worked with thousands of investors and particularly real estate because that’s my specialty is real estate. I worked with thousands and thousands of real estate investors over the last 40 years and guess what? They pay very little tax. Because the tax law favors business and real estate. And real estate actually has that combination. It’s a business and it also gets the real estate benefits of depreciation. So if you want to learn how to do this, just go back, listen to my podcast. It’s absolutely free. WealthAbility® Show and here’s what happens.

 

 

When you make your money this way if you’re going to make your money in a job and then spend it personally, there’s no tax benefits there. I mean, very little. Buy a house, you can get that tax benefit. Send your kid to college, get that tax benefit. There are a few. 401(k), that’s a huge tax incentive for retirement That’s a both a social and economic tax benefit because it goes into the stock market.

 

 

So again, this is not nefarious. It’s not. All right? So understand that the tax law is fair from the standpoint that anybody can do this. You don’t have to be a billionaire to do this. You can make a $100,000 a year or $50,000 a year and do this. Okay? What we’re about at WealthAbility® is it’s us giving you the education so that you have the ability to make way more money and pay way less taxes. See you next time.

 

Announcer:

You’ve been listening to the WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes. To learn more, go to wealthability.com.

 

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