President Trump's Tax Deductions -- And Yours

By Laura Saunders

President Trump is facing scrutiny for tax deductions that millions of Americans use, or would like to.

This week the New York Times published an extensive analysis of Mr. Trump's taxes after obtaining many years of his tax returns. The Times hasn't published the returns because it says it wants to protect its sources, making it hard to analyze the report with certainty.

Mr. Trump disputed the report, but he has repeatedly declined to release specific information about his taxes, unlike his opponents and predecessors.

Tax professionals say that several of Mr. Trump's reported deductions -- especially paying family members and making personal use of business assets, and sometimes grooming expenses -- raise issues they see in preparing returns for clients with far less wealth than the president's. The consequences of getting them wrong range from a slap on the wrist and an interest payment, to huge penalties or prison.

There is often a push and pull between tax preparers and clients in this process. The higher the fee, the greater the pressure on the preparer to do what the client wants. Yet tax professionals who sign false returns risk losing their licenses, so they often push back.

Andy Mattson, a CPA with Moss Adams in Campbell, Calif., who has wealthy clients who have founded tech companies, thinks such restraint is missing from Mr. Trump's tax returns, based on the Times's reporting.

"I'm shocked that an accounting firm would allow a client to take such egregious positions, especially when they know he will be audited every year," he says.

If you're tempted to follow Mr. Trump's tax lead, here's more to know about his deductions that are attracting the most attention. There's no need to forgo an allowed tax break, but smart taxpayers will want to know the boundaries.

Paying family members. The Times said a consulting firm co-owned by Ivanka Trump received a six-figure payment from the Trump Organization while she was also earning six figures or more as its employee.

Business owners often want to pay family members. Such arrangements can bring a net benefit to the family when the payment is deductible at a higher tax rate (say, 37%) than the one owed by the recipient (say, 10% or 12%).

The income-tax advantage of such moves shrinks if the owner and the relative are in similar tax brackets. Still, the recipient could put more than $50,000 into a retirement account this year or even far more, if that person has a special pension plan.

For the very wealthy, paying a relative can also yield estate-tax savings, as the pay moves assets and growth on them out of the owner's estate if he or she is one of the few Americans subject to estate tax. The estate-tax exemption is $11.58 million per person for 2020, and the top rate is 40%.

Jeffrey Porter, a CPA in Huntington, W.Va., says there can be nontax business reasons for paying relatives -- such as to remove cash from a business or provide assets to the recipient to qualify for a loan.

Mr. Porter says his clients often want to pay their children up to the amount of the standard deduction ($12,400 for a single filer for 2020) plus the amount they can put into a traditional IRA ($6,000 for 2020). He warns them that the recipients must actually work, and that the pay can't be excessive for the work done. Payroll taxes are also due.

"The IRS has won many cases on unreasonable compensation," he says.

What about paying a relative a consulting fee in addition to wages? That's likely to raise a red flag at the Internal Revenue Service, which may ask why the fee wasn't treated as extra wages.

Putting business property to personal use. This is another much-contested area. The Times said the Trump family claimed that a large estate in Westchester County, N.Y., was investment property but used it as a private retreat.

Under the tax law, an owner is supposed to keep records of personal versus business use and allocate expenses between them. Thus, if 40% of the property's use was personal, then 40% of the property taxes and maintenance costs would often be the owner's. The other 60% could be deductible as business or investment expenses, although other limits could come into play.

The allocation of state and local taxes has become more important since the tax overhaul of 2017, which limited the individual deduction for them to $10,000 per return. These levies aren't subject to the $10,000 cap if they are business expenses.

Issues often arise when a business owner uses a car for both personal and business use, says Ed Zollars, a CPA with Kaplan Financial Education who teaches tax professionals. The answer to resolving IRS issues begins with keeping good records on business mileage.

But real estate can also be a battleground. Mr. Zollars advises that if someone wants to claim a beach house as a business expense, then it shouldn't look like a vacation home.

He says the deduction should pass the "smirk test."

"If you tell the IRS something is a business property, the agent shouldn't smirk," Mr. Zollars says.

Deducting hair and makeup expenses. The Times reported that Mr. Trump deducted the cost of haircuts, including more than $70,000 to style his hair during "The Apprentice," and nine Trump entities deducted at least $95,464 paid to a favorite hair and makeup artist of Ivanka Trump's.

Kirk Stark, a tax professor at UCLA's law school, says others shouldn't follow suit. "If these facts are as reported, then these expenses aren't deductible. It's a total no-brainer," he says.

A television or movie studio can deduct the cost of hiring someone to do hair and makeup. But the tax rules usually say they are personal expenses that can't be business deductions if they are paid for by the individual, says Mr. Stark.

In one Tax Court case he cites, Drake v. Commissioner (1969), the judge ruled that an enlisted man in the U.S. Army couldn't deduct the cost of haircuts he got every two weeks to comply with Army rules.

In a more recent case, Hamper v. Commissioner (2011), a television news anchor deducted the costs of manicures, grooming, teeth whitening and skin care because she was required by her contract to have a neat appearance. The judge ruled that these expenses weren't deductible -- and imposed an accuracy penalty.

Write to Laura Saunders at [e-mail]