How Rich Do You Have to Be to Not Pay Taxes?

From TheAtlantic.com

By Alexia Fernández Campbell

“We don’t pay taxes. Only the little people pay taxes,” the billionaire hotelier Leona Helmsley was once quoted as saying. And it certainly seems that way, at least based on the The New York Times’s report that the Republican presidential candidate Donald Trump declared losing $916 million dollars in 1995, therefore making it unlikely that he would have to pay federal income taxes for several years afterward.

Which raises a question: How rich does someone have to be to not pay federal income taxes? The question seems oxymoronic, but tax experts have been suggesting that only the super-wealthy can take advantage of the tax code to keep portions of their income out of the hands of the IRS. But what would the average person have to do to gain similar advantages? It turns out it’s possible for a small-business owner to be exempt from federal income taxes, but it would require a level of financial devastation that nobody would wish upon themselves.

The tax code is set up so that most business owners can deduct financial losses from their income when they file their tax returns, so the government doesn’t end up taxing someone’s lost income. For example, a business owner who invests $10,000 of her money into her own business can deduct $10,000 from her taxable income.

To pay no federal income taxes for multiple years is something else, as someone would have to lose more money in a given year than they earned. Which makes sense: Why should someone have to pay income taxes if they didn’t earn income, but lost money instead? That scenario, which applies only to people who own businesses, might look like this: A person decides to put up $100,000 of his money to open a coffee shop, but the coffee shop completely fails and the business owner loses all $100,000. Assuming he has no other income, that would show up as negative $100,000 in earnings on a tax form. That failed entrepreneur could go without paying income taxes until he finally recoups the $100,000, because his losses can be carried over to following years. So if he makes $50,000 each year for the next two years, he wouldn’t pay income taxes until he started earning again in the third year.

So theoretically, it’s possible that Trump invested nearly a billion dollars of his personal wealth into his failed casinos, eclipsing whatever he earned from all his other businesses that year. But the reported loss is so staggering that many tax-law experts believe he may be benefiting from provisions in the tax code that specifically benefit real-estate developers. These generous tax breaks could reduce his reported income in later years to zero, or even a loss. More to the point, those loopholes would allow him to claim losses on someone else’s money—in other words, money he borrowed to buy real estate that then depreciated in value. The truth is, no one who hasn’t seen every page of Trump’s 1995 tax forms knows for sure. (Trump’s campaign declined to talk to the newspaper about the source of those losses.)

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