Last week, the first two pages of Trump’s 2005 federal tax return were released. Are we really going to talk about our current president’s tax return from 2005? A little bit… But who cares? It was 12 years ago. Good point, but there are actually some relevant points which shed some light on which tax changes Trump plans to make while in office and why he wants to make them.
Alternative Minimum Tax (AMT)
The AMT is one of the most complicated topics in the Internal Revenue Code and attempting to explain how it works will most certainly bore you, but I will try to give you an extremely short rundown of how the AMT usually works (if you do want to read an in-depth article about the AMT, click here). Established in 1978 and originally intended to affect the 1%ers, the AMT is basically an additional tax computed on your income as if some tax-exempt items of income are actually taxable and a majority of the deductions you are entitled to are disallowed and added back to your taxable income.
Looking at page 2 of Trump’s 2005 Form 1040, you can see on Line 44 that his tax is about $5.3 million. Line 45 represents the $31.2 million AMT Trump was hit with, bringing his tax liability (before foreign tax credits and self-employment tax) to just over $36.5 million. If in 2005 there was no AMT, Trump would have saved $31.2 million in tax dollars. In the least shocking news of all time, Trump wants to repeal the AMT and now we have at least a little bit of confirmation why. After all, $31.2 million buys a lot of spray tan and hair care.
Net Investment Income Tax (NIIT)
The NIIT, a component of Obamacare, is a 3.8% surtax on investment income if your income exceeds a certain limit. It wasn’t put in place until January 1, 2013, so it’s not relevant when discussing Trump’s 2005 tax return, but assuming Trump’s sources of investment income remained somewhat the same since then, we can imagine that it’s affecting him now. Looking at Page 1 of Trump’s return, the following items are considered investment income (rounded):
- Line 8a – Taxable interest – $9.4 million
- Line 9a – Dividends – $314,000
- Line 13 – Capital gains – $32.1 million
- Line 17 – Rental real estate, royalties, partnerships, S corporations, trusts, etc. – $67.3 million (it’s possible that not all of this would have been subject to the NIIT but, what the hell, let’s assume all of it would have been)
That’s close to $110 million in investment income. There are some additional adjustments and modifications that go into the computation of the NIIT, but you can reasonably assume Trump would have been hit with a couple million in additional taxes in 2005 if the NIIT had been in place. This is one of the reasons Trump wants to repeal Obamacare; he would certainly benefit from the disappearance of the NIIT.
Last but certainly not least: tax brackets. In 2005, the top tax rate was 35%; now it’s 39.6%. Trump is no stranger to the top tax bracket, which explains why he is proposing to modify the tax brackets and lower the top rate to 33%.
Now we wait and see what changes are actually proposed and passed. And I guess we wait and see if any more current Trump tax returns surface. All in all, this “huuuuuge” release of Donald Trump’s tax returns didn’t give us much insight into his current tax situation, but at least it gave us a basis for assumption. Now we can see why he wants to change the taxes that affect the rich (as if we didn’t already know).
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Nick Aiola is a CPA and the owner of Aiola CPA, PLLC. Nick and his team provide the highest quality of tax and advisory services to real estate investors and individuals and business owners in the real estate industry.
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