U.S.

The 13 Outrageous Tax Giveaways Donald Trump Ignores

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U.S. Republican presidential candidate Donald Trump speaks during a news conference to reveal his tax policy at Trump Tower in Manhattan on September 28, 2015. Shannon Stapleton/Reuters

Presidential candidates from Donald Trump to Hillary Clinton say they’ll abolish a tax favor Congress grants hedge fund managers, and they’re eager to denounce those who, as Trump accuses, are “getting away with murder.”

“Hedge fund guys didn't build this country. These are guys that shift paper around and they get lucky,” Trump said on CBS's Face the Nation. Expect more talk like that in the upcoming Democratic and Republican debates.

Trump’s plan would raise taxes on hedge fund managers by eliminating “carried interest.” That’s what allows them to be taxed at just 20 percent, instead of 39.6 percent for top earners.

But carried interest is hardly the most outlandish provision in the tax code. Here are 13 of the worst giveaways.

Real Estate Pros. Congress lets developers like Trump live income tax-free. Anyone who works 15 hours a week on rental real estate they own can take unlimited deductions to offset income from other sources, such as a salary or fees for putting your name on neckties. The biggest deduction is for depreciation, the supposed loss in value of the building as it ages.

Congress limits most Americans to a $25,000 deduction against other income and denies any offset to those who make more than $150,000 or are on the Alternative Minimum Tax. Trump stopped paying income taxes in 1978, but no one knows if he ever resumed paying. As the saying goes among tax lawyers: If you’re a major real estate family and pay income taxes, sue your tax lawyer for malpractice.

Tax-Free Income for Heirs. When you sell stocks and other assets, the profit is taxed. But at death any gains become tax-free, except for the richest 3,300 people whose estates are so large Congress taxes them. Repealing the estate tax, which Trump and other Republicans favor, would increase the inheritances of wealthy heirs by $269 billion in the next 10 years, the Congressional Joint Committee on Taxation estimates.

Gift Tax Loophole. Congress lets you give up to $14,000 a year to as many people as you choose without paying gift taxes. But non-cash gifts can be easily undervalued. IRS audits found cheating in 85 percent of non-cash gifts audited and more recently found that when real estate is transferred, dscheating ranges from 60 percent in Delaware to 100 percent in Ohio.

Mitt and Anne Romney confirmed in writing in 2012 that no gift taxes were paid on the $100 million trust fund for their five sons, created when the tax-free limit for a couple was under $2 million.

How did the Romneys do it? We don’t know, but one way would be to create a corporation with little or no sales, give shares to the sons’ trust and then sign contracts making the company valuable.

Trusts. When the stock market is rising, rich people can create trusts that pass the rising value of their wealth to heirs and with only the original amount goes back to the original donor. They are known as Grantor Retained Annuity Trusts. Even the lawyer who first conceived them, Richard B. Covey, says they make a mockery of the tax code. Rich Americans used GRATS to avoid more than $100 billion of taxes since 2000.

Pocketing Taxes. Regulators allow utilities to include the “grossed up” cost of their income taxes in charges to customers. But since 1987, oil and gas pipelines have been exempt from this levy.

That means customers pay the pipelines’ income taxes, but government never gets the money. Estimates of taxes the pipeline managers pocketed over the last decade range from about $20 billion to more than $34 billion.

Profiting From Taxes. Congress lets American companies deduct royalties and fees paid to their offshore subsidiaries, where the untaxed profits can be invested or loaned back to the American parent company. Defer the tax for two or three decades and the earnings on the deferred taxes will be worth more than the tax itself.

More Profiting From Taxes. Hedge fund and private equity managers can defer most of their income back into their funds, avoiding immediate taxation. Congress changed the law in 2009 to stop this, but data since then have shown the change failed to close this loophole.

Even More Profiting Off Taxes. After Enron collected nearly $1 billion from customers of its Portland General Electric utility for federal income taxes it legally never had to turn over, Oregon lawmakers passed a law requiring that money collected for taxes be paid to government or returned to customers. Lobbyists for a Warren Buffett company that now owns the Oregon utility got the law repealed in 2011, allowing Berkshire Hathaway to collect taxes from customers and keep them just as utilities do in every other state.

Corporate Tax Breaks for Misconduct. Congress generally lets companies deduct penalties paid for misconduct. BP reportedly saved up to $14 billion in damages it paid over the 2012 oil spill in the Gulf of Mexico. Federal regulatory agencies rarely specify that a penalty is punitive and thus ineligible as a tax deduction, studies by the Congressional Government Accountability Office (GAO) and the nonprofit U.S. Public Interest Research Group both found.

More Kids, More Tax. This is one way big families get an unfair hit. Having three or more children can make you subject to the Alternative Minimum Tax, under which nearly all deductions are denied. Having 13 children made David and Margaret Klaassen, a middle-class family from of Marquette, Kansas, subject to the AMT, which added 63 percent to their federal income taxes .

Taxing The Sick to Help The Rich. The Klaassens and many other families also fall under the AMT because of big medical bills. Most taxpayers can deduct medical bills above 7.5 percent of their Adjusted Gross Income, the last line on the front page of your Form 1040 tax return. Under the AMT only expenses above 10 percent are deductible. Since 2001, all AMT funds have been used to help finance tax cuts for those at the top, meaning Congress implicitly taxes some people with cancer or other costly medical conditions so the rich can pay less tax. The total amount is small, less than $100 million per year, and many members of Congress have denounced the provision, but it will soon be 17 years since the Klaassens case became known and nothing has been done.

Sports Tickets and Sky Boxes. Most people buy sports tickets. But companies can deduct the cost as ordinary and reasonable business expenses, using pre-tax dollars. (This tends to drive up the costs of sporting event tickets, which have soared in recent years.) The same is true for the cost of luxury skyboxes. Congress even lets individuals take a charitable deduction for luxury boxes at college sports arenas.

Few Audits, Fewer Prosecutions. Congress has cut the IRS budget per taxpayer in half since 2000, a subtle favor to tax cheats. Wage earners and pensioners still get fully taxed because taxes are taken out before they get paid in a largely automated system. But the only way to make sure corporations, small businesses and landlords pay in full is audits. Time spent on corporate audits fell by 27 percent from 2011 to 2013, the Transactional Access Records Clearinghouse found. These auditors find $19 million in taxes due each year on salaries of no more than $150,000.

There are thousands of other provisions in the tax code that favor this interest or penalize that one. No candidate for president in either party has put forth a plan to eliminate all of these provisions.

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