27 Sep Why Trump’s tax returns really don’t matter
by Jerry Lynch, CFP, JFL Total Wealth Management
So I look at everyone’s tax returns. It’s kind of a hobby. (I know, I need to get a life). For me, it is fun to see if they pay more than they need to in taxes. I have reviewed President Obama’s several times and the Clintons’ recently as well.
I realize some of you are asking: “Why he is only reviewing Democratic returns?” so I would like to respond to that.
First, for the record, I am an independent and I think that there are idiots on both sides of these political parties. Second, the most recent Republican return available — Mitt Romney — was simply way too large to review for fun.
I can see a lot in a tax return. I can tell if you are healthy (medical deductions), how much you have in cash (interest), your charitable contributions, and many other things. It is kind of an X-ray into someone’s personal finances.
However, just like an X-ray, it will not show everything and that is why when I meet with a potential client, I need to get more information.
The personal financial statements are more like an MRI and will give me more detailed on what is below the service. Here is what you will not see, especially for a business owner:
1) Charitable Contributions from the company: Many people who own C corporations do charitable deductions though their company, so the deduction will not appear on their personal returns. The deduction still comes from them if they own the company, but it will appear on the corporate, not personal, returns.
2) Income: Yes, I realize this is strange but for business owners, you may receive income in your pocket, but not all of that income is reported as taxable income, especially if you own real estate as Donald Trump does. You get a depreciation allowance that offsets a good part of that income so what you are seeing on the return is lower than the cash you received. Spending cash from your bank is not taxable income. It is possible to live a very good lifestyle and not have much in taxable income.
3) Assets: Tax returns do not show assets, just taxable income. For example, if you have a house, the returns do not show the value, but only what you pay in property taxes. If you own a business, it does not show what it is worth, but only what you received in taxable income. If you own stocks, it will not tell you what they are worth, but only what you received in capital gains and dividend income. You cannot figure out someone’s net worth based upon a tax return.
4) Tax Rate: Now this can be complicated based upon the types of companies that a person owns. If you own a C corp. and get dividend income, the corporation has already paid their corporate tax, then the individual pays a tax as well. So there are two separate levels of income tax that he would pay. You have two separate tax rates. LLCs and S corps. are flow-through organizations, so all that income is paid at a personal level (not corporate). So depending on the type of businesses types that he owns, his effective tax rate can actually be much higher.
Am not saying that Trump should not show his tax returns? I see no reason why he can’t, and I think it is hurting him politically. My point is simply this: Showing his tax returns more likely than not will not produce an “ah ha!” moment. A personal financial statement (if accurate) will give you a much better idea of what his personal financial situation is.
Jerry Lynch is a certified financial planner with JFL Total Wealth Management. He may be reached at firstname.lastname@example.org or (973) 439-1190.
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