What can we learn - Trump's 1995 tax return
We have limited information from the New York Times story on Donald Trump's 1995 tax return as they received only three pages. Of those, only one has any real information worthy of analysis.
Let's see what we can learn from analyzing these numbers, line by line:
Line 1. Someone gave him a W-2 or multiple W-2s for a total of $6,108 in wages.
Line 2. He reported $7.3 million in taxable interest income. Average Bank CD rates in 1995 were between 4 and 6 percent. If we assume his interest income was earned at the rate of 5 percent, we can estimate that he had over $140 million in interest bearing accounts.
Line 3. The $26,051 here is made up of dividends from investments Trump owned during 1995.
Line 4. This $62,205 represents income tax refunds he received from the state of New York during 1995, probably from his 1994 New York state income tax return.
Line 6. This is income from self-employment or sole proprietorship, a situation where someone owns their own business that is not structured as a corporation or partnership.
Line 7. He claimed the maximum amount of capital losses, but without the federal Schedule D, we have no way of knowing any specific information about his gains and losses.
Line 8. This shows $1.35 million in other losses, possibly from the sale of business property at a loss. Again, without the federal return details, there isn't much to be learned here.
Line 11. The $15.8 million in losses on this line is worthy of more in-depth discussion and analysis.
Line 15. This is the big one. $909.4 million in losses, apparently a Net Operating Loss (NOL) being carried forward or backward. Without the description in Statement 1, all we know is this and the line 11 amount are the primary factors in the $915 million in NOLs the New York Times wrote about.
* * *
Now let's talk about Line 11 in detail because this is an even bigger tax break that Trump and other real estate "professionals" are eligible for. The term real estate professional is an IRS term and it gives people who can meet the definition a tremendous tax break. This is because of something known as Passive Loss Limitations, and the exception to those rules granted to real estate professionals.
Ordinarily, passive losses cannot be used to reduce other types of income. As an example, consider another John Taxpayer situation. Mr. Taxpayer has a W-2 job that paid him $151,000 in 2015. He also owns one rental home that for tax purposes that lost $30,000 in 2015. Since Mr. Taxpayer is not a real estate professional, he cannot use that loss to reduce the tax owed on his wage income.
NOTE: For taxpayers whose Adjusted Gross Income (AGI) is below $100,000, there is a special exception involving rental real estate losses making up to $25,000 deductible against any other income in a given year, provided the taxpayer is "actively involved" in their rental activity. That deduction begins to phase out when AGI reaches $100,000 and disappears completely when AGI reaches $150,000.
Aside from the exceptions noted above, passive losses can only be used to offset passive income. Otherwise they are carried forward indefinitely. But when the taxpayer is a real estate professional, passive losses can offset any income. What that means is that even if Donald Trump had not been carrying forward a big Net Operating Loss, he still would have had his New York state tax liability greatly reduced by that loss of more than $15 million.
This break is one that the real estate industry works very hard to protect. For obvious reasons.
It is worthy of as much attention as the issue of the Net Operating Losses Mr. Trump has incurred.
Let's see what we can learn from analyzing these numbers, line by line:
Line 1. Someone gave him a W-2 or multiple W-2s for a total of $6,108 in wages.
Line 2. He reported $7.3 million in taxable interest income. Average Bank CD rates in 1995 were between 4 and 6 percent. If we assume his interest income was earned at the rate of 5 percent, we can estimate that he had over $140 million in interest bearing accounts.
Line 3. The $26,051 here is made up of dividends from investments Trump owned during 1995.
Line 4. This $62,205 represents income tax refunds he received from the state of New York during 1995, probably from his 1994 New York state income tax return.
Line 6. This is income from self-employment or sole proprietorship, a situation where someone owns their own business that is not structured as a corporation or partnership.
Line 7. He claimed the maximum amount of capital losses, but without the federal Schedule D, we have no way of knowing any specific information about his gains and losses.
Line 8. This shows $1.35 million in other losses, possibly from the sale of business property at a loss. Again, without the federal return details, there isn't much to be learned here.
Line 11. The $15.8 million in losses on this line is worthy of more in-depth discussion and analysis.
Line 15. This is the big one. $909.4 million in losses, apparently a Net Operating Loss (NOL) being carried forward or backward. Without the description in Statement 1, all we know is this and the line 11 amount are the primary factors in the $915 million in NOLs the New York Times wrote about.
* * *
Now let's talk about Line 11 in detail because this is an even bigger tax break that Trump and other real estate "professionals" are eligible for. The term real estate professional is an IRS term and it gives people who can meet the definition a tremendous tax break. This is because of something known as Passive Loss Limitations, and the exception to those rules granted to real estate professionals.
Ordinarily, passive losses cannot be used to reduce other types of income. As an example, consider another John Taxpayer situation. Mr. Taxpayer has a W-2 job that paid him $151,000 in 2015. He also owns one rental home that for tax purposes that lost $30,000 in 2015. Since Mr. Taxpayer is not a real estate professional, he cannot use that loss to reduce the tax owed on his wage income.
NOTE: For taxpayers whose Adjusted Gross Income (AGI) is below $100,000, there is a special exception involving rental real estate losses making up to $25,000 deductible against any other income in a given year, provided the taxpayer is "actively involved" in their rental activity. That deduction begins to phase out when AGI reaches $100,000 and disappears completely when AGI reaches $150,000.
Aside from the exceptions noted above, passive losses can only be used to offset passive income. Otherwise they are carried forward indefinitely. But when the taxpayer is a real estate professional, passive losses can offset any income. What that means is that even if Donald Trump had not been carrying forward a big Net Operating Loss, he still would have had his New York state tax liability greatly reduced by that loss of more than $15 million.
This break is one that the real estate industry works very hard to protect. For obvious reasons.
It is worthy of as much attention as the issue of the Net Operating Losses Mr. Trump has incurred.
posted by me at 6:55 PM
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