Donald Trump’s taxes still have many people scratching their heads: How did he incur such massive losses? What happened in other tax years? Is what he did legal? And how is this even possible?

The U.S. tax code is notoriously complex. But in general, federal income tax is progressive — those who earn less face lower taxes and those who earn more face higher taxes. There are many ways to legally reduce or even eliminate that tax burden.

A 2011 study from the nonpartisan Tax Policy Center found about 46 percent of Americans paid no federal income tax (it estimates 44 percent will not pay any this year). About half of those not paying federal income tax had no taxable income, while the other half took advantage of measures in the law that allow them to wipe out their tax liabilities.

The latter primarily benefit lower- and middle-income groups, thanks to things such as the earned income tax credit, child credits or education tax credits. However, many high-income individuals are also able to benefit from tax policy.

Tax experts say the code is full of loopholes that may be available to everyone, but tend to benefit the rich.

That is part of what has made The New York Times’ recent revelation, raised again at the most recent debate, so intriguing. According to tax documents leaked to the newspaper, Trump claimed more than $900 million in losses in 1995, enough to potentially and legally reduce his tax bill to zero for as many as 18 years.

Trump has yet to release his taxes, although he said he will when his audit is complete.

But it appears to have been done through one of many elements in the tax code favoring real estate developers. But there are many other legal paths for anyone of significant means to lower their tax payments.

The Republican presidential candidate and his supporters call his tax moves smart, others say they’re unfair.

“It’s emblematic of the way most people feel about the tax system,” said Matt Gardner, executive director of the Institute on Taxation and Economic Policy, a nonprofit and nonpartisan research organization. “It favors those who have the resources.”

The public sees the nation’s tax system as deeply flawed. A 2015 survey by the Pew Research Center found that 59 percent of Americans say there is so much wrong with the system that Congress should completely change it. It also found that 61 percent feel that some wealthy people don’t pay their fair share.

The Associated Press spoke to a few experts about some of the ways that the wealthy can work within the law to lower their federal income tax. Here are a few:


Trump has brought this common accounting practice into the spotlight.

It allows businesses to count losses, including real estate depreciation, against other income to lower their taxes. This could potentially wipe out their tax payment completely for the year. And if losses exceed income, they can carry that balance forward to future years to reduce their tax burden.

It is designed to smooth the ups and downs in a company’s profitability over the years to help them stay afloat. But the loophole exists when you can burst outside of the business loss and apply it against any kind of income, Gardner said.

Tax code changed in the ’80s to disallow people from exploiting this opportunity and generating losses to count against personal income. But the provision remained in place for professional real estate developers, such as Trump.

“If ever there was a gig that was rigged against regular folks, this is it,” said Neil Buchanan, an economist and tax law professor at George Washington University.


A more common way for higher-income people to lower their personal taxes is through deductions, such as donations to charity, unreimbursed business expenses and even mortgage interest deductions on second homes.

The IRS publishes data annually on the individual tax returns of people who report income of $200,000 or more. It showed high-income people found many ways to reduce their tax burden, the most common of which in 2013 — the most recent year available — was total miscellaneous deductions.

It’s still not common for high-income individuals to face zero tax though.

That same IRS report showed that of the 5.6 million income tax returns with an adjustable gross income of $200,000 or more in 2013, only 12,517 faced no U.S. income tax liability that year. That is roughly 0.2 percent of high-income returns filed that year. By comparison, nearly 18.6 million taxpayers with incomes under $50,000 faced zero U.S. income taxes that year— roughly 20 percent of that income group.

There are limits on deductions though, even for the rich.

Warren Buffett, the famed billionaire investor who was called out by Trump in the last debate for over deductions, said he could only claim about $3.5 million of his nearly $2.9 billion in charitable deductions because of caps in place per tax law.

Buffett also pointed out that he has paid federal income tax every year since he was 13.


Capital gains are the profit from the sale of an investment. And while there is one set of tax rates for wages, there is another for capital gains, running from zero to 20 percent.

Buffett, for example, has previously noted that he is taxed at a lower rate than his secretary, another issue that raised its head at the debate. This is due in part to capital gains taxes. He and his peers “make money with money” as he once wrote in a New York Times op-ed, so their income is primarily subject to capital gains tax rate. Meanwhile, middle and lower-income Americans are paying taxes based on wages, which face a different and sometimes higher rate.

In fact, tax experts are quick to point out that any review of federal income tax does not reflect the full amount that Americans pay in taxes. We face taxes every day — gas tax, property tax, local and state taxes — and they often weigh heavy on the lower and middle class.


Popular with hedge-fund and private-equity managers, this allows some of their pay to grow and only face taxes when they cash out.

These partners and managers’ compensation often comes from gains on the money they manage. They are paid a fee on the assets under management, plus a cut of the profits, known as carried interest. The fees are taxed as ordinary income but carried interest is taxed at capital gains rate.

It has often come under scrutiny and the U.S. Treasury has estimated that taxing carried interest at ordinary income rates would raise about $18 billion over 10 years.

“It’s become the poster child of things that are unfair,” said Kyle Pomerleau of the Tax Foundation. But he argues it’s not a significant loophole in terms of total dollars that could be recovered if it were closed.

“These sorts of exemptions or deductions or credits are throughout the tax code,” he said.