Donald Trump paid no federal income taxes in 10 out of the 15 years examined in a 2020 New York Times investigation. The average American household, on the other hand, pays thousands in taxes every year.
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This gap is an example of how the tax code treats a real estate investor like Trump differently from a salaried worker. Here is how that system works in practice and what most people miss.
A System Built on Incentives
For most Americans, taxes are gone before the money gets to their accounts because it’s withheld automatically. W-2 earners claim the standard deduction, file in April, and repeat. Their income is visible and easy to collect.
Real estate investors operate under a different kind of tax treatment. Through depreciation, an investor can write off the theoretical wear and tear on a property, even one actively gaining value. Through a 1031 exchange, they can sell a property and roll the proceeds into a new one to defer capital gains taxes. Through loss carryforwards, losses from one year can be used to offset taxable income in future years.
Each tool is legal and written directly into the tax code. Many of these strategies are difficult to access for people whose income comes primarily from wages.
“The tax code is an incentive system,” said Nik Agharkar, a tax attorney and founder of Crowne Point Tax. “The government’s system of taxation incentivizes people to do certain things — primarily in real estate, investing, oil and gas and business ownership.”
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How Trump Did It
According to the Tax Policy Center, 99.6% of households earning over $1 million paid more in federal income taxes in 2016 than Trump did. He was an outlier, even among the wealthy.
Trump’s returns, released by the House Ways and Means Committee in 2022, revealed negative income in four of six years examined, according to NBC News. In 1995, he reported a $915.7 million net operating loss that allowed him to offset taxes for years, according to the New York Times investigation. He paid no federal income taxes in 2020 and claimed a $5 million refund, according to returns released by the House Ways and Means Committee.
Where That Leaves Everyone Else
Some of these strategies are available on a smaller scale. Owning a rental property, contributing to a SEP-IRA or using a health savings account can all reduce taxable income. However, they often require upfront capital and long-term planning that many W-2 earners simply do not have early in their careers.
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This article originally appeared on GOBankingRates.com: Why Donald Trump Has Paid Far Less in Taxes Than Most W-2 Workers
