Trump Tax Return: How to Avoid an Audit | Investor’s Business Daily – Investor’s Business Daily

Don’t do what former President Donald Trump did in his federal tax returns. That is if you want to avoid an IRS audit, several financial advisers told Investor’s Business Daily amid the release of Trump’s tax returns by the House Ways and Means Committee.

Trump’s tax returns spark debate over whether the former president’s returns have received the scrutiny legally required by the IRS.

But just as important to millions of ordinary taxpayers, Trump’s tax returns highlight crucial dos and don’ts for non-Trump taxpayers. “Trump’s tax returns bring to mind strategic questions about tax preparation for the rest of America’s taxpayers,” said Tom Wheelwright, CEO of WealthAbility.


Trump tax return: lessons for you

Financial advisers who spoke to IBD addressed a small number of points in the Trump returns. They mainly have to do with steps like claiming deductions – especially business losses – and making loans to his children.

The commission also looked at tax returns for several partnerships and S Corporations associated with Trump and with a Trump revocable trust. The commission received a report on the declarations and associated documents from its Joint Commission on Taxation.

This report focuses solely on takeaway advice for taxpayers, not the politics or validity of the Trump returns themselves.

Highlights from Trump’s tax returns

Here are some highlights from Trump’s tax returns. Four of these are about the years Trump occupied the White House:

  • 2017: Trump and his wife Melania reported negative adjusted gross income (AGI) of $12.9 million. They paid $750 in net income taxes.
  • 2018: The Trumps reported an AGI of $24.3 million. They paid a net tax of $999,466.
  • 2019: The Trumps reported an AGI of $4.4 million. They paid $133,445 in net income taxes.
  • 2020: The Trumps reported a $4.8 million negative AGI. They paid no net income tax.

The committee also released Trump’s tax returns years before his election:

  • 2015: AGI of negative $31.8 million, net income tax paid of nearly $641,931.
  • 2016: negative AGI of $32.4 million, net income tax of $750.

Self-employment tax

So, what are some steps that consultants say taxpayers in general should be wary of when preparing their own tax returns?

Minimize the tax on the self-employed. “He pays a lot of self-employment taxes,” said Wheelwright, who contributed to Robert Kiyosaki’s book “Rich Dad Success Stories.” “He pays hundreds of thousands of dollars there. With proper planning, this could have been avoided.

  • Advice: “In general, it’s easy to avoid self-employment tax by using an S Corporation instead of a partnership,” said Wheelwright. “It seems like a mistake to file Schedule Cs, which create self-employment taxes. Instead, he should incorporate as an S Corp and pay himself a small salary. Schedule Cs also have a high audit risk. The IRS likes to checking them. If you have an S Corp, you have a full set of financial statements with an income statement and a balance sheet. A Schedule C has only an income statement, only income and deductions, no assets and liabilities. So the IRS asks wonder if there’s something else going on. An S Corp lets the IRS see whatever it wants to see.”

Don’t try to deduct hobby expenses

Do not declare hobby costs. In addition, try not to declare expenses for a hobby on your tax return as if they were for a business, says Ray Prospero, partner advisor at Advisory Period. Hobby costs are not business costs.

  • Advice: The House Ways and Means summary appears to indicate that the IRS paid particular attention to Trump’s Schedule C expenses, Prospero says. “Schedule C is reserved for sole proprietorship business income or losses,” he said. “Based on the report, Trump hardly reported any income and regularly stated expenses only on his Schedule C forms. In addition, the report suggested that some of the stated expenses could be derived from President Trump’s “personal activities and hobbies,” rather than legitimate businesses. As a general rule of thumb, when including Schedule C information on a tax return, one should ensure there is a valid sole proprietorship, and any expenses listed should be clearly distinguishable as such and segregated from personal activities or hobbies.”

Make loans legal

Document loans to your children. That is if you want to deduct the interest paid to you on a loan as a deduction on a tax return. Otherwise, their proper treatment could be as gifts that could tax you.

Trump loaned money to his children Donald, Eric and Ivanka. Loans from 2015 through 2020 totaled $97,000. In its report, the Joint Committee on Taxation questioned whether these related party loans, as they are called, were actually gifts that should be taxable to Trump. They would be taxable if they were gifts and if Trump gifts totaled more than the combined lifetime estate and gift tax exemption. For 2022, the exemption increased to $12.06 million. Before that, it was at least $5 million since 2010.

To be treated as loans rather than gifts, loans must charge recipients at least as much interest as specified in IRS tables. Rates have been low. That is a reflection of the low rates that prevailed until the recent rate hike. Used properly, bona fide gifts transfer wealth from a parent to a child with minimal or no tax.

  • Advice: Take all the steps you would when giving a regular business loan to a stranger, IRA expert says Ed Slot, which hosts a retirement savings program on the Public Broadcasting System (PBS). Put everything in writing. Include an amortization schedule with payment amounts and dates for principal and interest. Download one and include it in your contract with your children. “Calculate interest rates that reflect the real, prevailing rates or use the IRS tables,” Slott said. “And put in the contract language that shields you if you don’t get paid back on time. You can say something like, ‘If you don’t pay back on time, it will come out of your inheritance.’ At least have a lawyer prepare the warrants. If you don’t want to do those things, just accept the fact that you’re making a gift and don’t try to deduct it.”

How to use an easement

Time your easements. For Trump, questions have been raised about whether he used the exaggerated value of a conservation easement to offset taxable income.

  • Advice: Taxpayers, of course, should only use proper appraisals when making easements. But the issue of broad easements does raise a strategic point for tax preparation that may apply to taxpayers at large when preparing tax returns, advisers say. Create easements in years when your taxable income is high, says Matt Masterson, a partner, wealth advisor and director of financial planning at CI RegentAtlantic Private Wealth. That way, the charitable deduction for making the easement — by which you agree to forego developing the property — offsets as much income as possible, he says. You can also determine in which year this happens. Make the easement in a year when you also make a Roth IRA conversion, creating taxable income. “You would coordinate with a Roth conversion by having both the easement and conversion occur in the same tax year,” Masterson said. “You would get a large charitable deduction from the easement to offset the income from the Roth conversion.”

Personal problems: Should a taxpayer’s individual returns be made public, as former President Trump did? “We’ve always assumed returns were between you and the IRS,” said CPA Slott. “Why are these different? Why make these public now? They (the House Ways and Means Committee) open a door that makes people uncomfortable. Regardless of your politics, there’s something wrong with it, at least for me.”

Why here and now? “Congress gets oversight of the IRS, and that oversight involves people, including the president,” said Garrett Watson, a senior policy analyst at the Tax Foundation. “They have the legal authority to disclose returns. The reason they are doing it here is because of their role in overseeing the IRS’s auditing programs. The question is whether the IRS was lax in its review of the IRS’s returns. President. If so, is that fair to other taxpayers?”

Follow Paul Katzeff Twitter at @IBD_PKatzeff for tips on personal finance and the best mutual funds.


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