No wonder he’s happy – apparently he’s getting a great deal on his taxes
Andrew Caballero-Reynolds/Agence France-Presse/Getty Images
When it comes to Donald Trump and his taxes, I know what you’re going to say.
“Hey, Guy Who Writes About Money! Stop telling me how outraged I’m supposed to be about Trump’s taxes. Tell me something useful—like how I can get the same kind of deal.”
Well, here’s some great news. I’ve got your back.
For years I’ve been trying to interest publishers in a book called “How To Steal Like Wall Street.” No, not another book about how plutocrats work the system on taxes, debts and everything. But a tongue-in-cheek book on how you and me, the ordinary Joe or Jane, might do the same. (Cue that long-forgotten sports classic Gamesmanship.)
Oh boy, is there a lot of material. Imagine if we all acted like Wall Street.
A case in point is the buzz about Donald Trump’s taxes. According to the New York Times, the president paid no taxes—federal income taxes, that is — in at least 10 years this millennium, and paid just $750 in 2016, the year he was elected president, and 2017.
Trump responded by slamming the Times as “the Fake News Media,” adding that he had paid “many millions of dollars in taxes but was entitled, like everyone else, to depreciation & tax credits.”
But let’s get away from the political and talk about the personal.
As a commenter on the Reddit forum Financial Independence, going under the label IH8Tumbleweeds, put it while talking about his own finances, “My philosophy in life (family, taxes, politics, money) has been “tell me what the rules of the game are, and I’ll figure out how to win”. I see so many people whining how they can never succeed in the current ‘system’ (thankfully not so much on this thread), when in reality, no one is going to come along and change the rules for you personally so you can succeed. It’s your job to win given the current system the best we can.”
So, given the current system, how can you win?
The single best tax shelter available to every Joe and Jane in America is the retirement system. Most people already know that if you are a salaried employee you can contribute $19,500 a year to your 401(k) or the equivalent at work, all tax-deferred. Not everyone knows that they can add another $6,500 a year once they’ve turned 50.
On top of that they can save another $6,000 a year in an IRA, and that also rises to $7,000, once you turn 50. And if you have a nonworking spouse you can contribute the same again for them. If you already have access to a 401(k) at work, these contributions may not be deductible from your taxable income, if you’re above certain income limits.
Read: A spousal IRA may be the best gift you can give to your nonworking spouse
But even if you’re not, you can make a nondeductible contribution and immediately convert it to a Roth, which means you won’t pay any future taxes on your gains. (There are some convoluted rules which mean you may pay some upfront taxes on this Roth conversion.)
Not taking full advantage of these means you’re paying too much tax. It’s that simple.
But these deals pale compared to what you can get if, like Trump, you run your own business, or more usefully for most of us, you’re self-employed.
Anyone who really wants to “win” at the American tax system needs to get out of payroll serfdom. During the years I worked as a freelance writer my gross income fell, but I ended up ahead because my taxes absolutely collapsed. Yes, there are (legal) business deductions available to the self-employed. (Incidentally, as a general principle, I’m not sure why a TV star shouldn’t be able to deduct the costs of his hair stylist, but that’s a matter for the accountants and the IRS.)
But the real kickers, once again, are the retirement plans: The Self-Employed or SEP IRA, and the Solo 401(k).
Every time I get in an Uber UBER, +1.63% or a Lyft LYFT, +1.91% I ask the driver if they have one. So far not one to whom I’ve spoken has even heard of these accounts. So they’re effectively just volunteering to pay too much tax—without realizing it, of course.
Naturally, not everyone can afford to take full advantage of these plans. But if they can, they are just leaving money on the table.
The SEP-IRA lets you save 25% of your self-employed income tax-deferred, up to a maximum of $57,000. A Solo 401(k) lets you save more because you are basically able to contribute as the employer and the employee, and the IRS says the $57,000 maximum doesn’t include catch-up limits for those age 50 or over.
Tax-sheltered retirement plans don’t save you from all taxes. If you save the money tax-deferred, you will have to pay taxes on the money you withdraw when you retire. But how much that comes to is going to depend on your own circumstances. Chances are good you’ll be in a lower tax bracket when you’re old than when you’re working. According to the Federal Reserve, the median income of a working family is about $70,000. That of a retired household: Just $36,000, or barely half that.
Most importantly of all is that these accounts essentially offer ‘poverty insurance.’ That’s because income taxes (of course) are progressive. So, yes, if you have plenty of money in retirement and a good income you could end up paying significant income taxes on your IRA and 401(k) withdrawals.
On the other hand, if you’re broke in retirement and desperate for every nickel, you won’t pay much income tax on your withdrawals—or any at all.
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