RICHARD NIXON IS best known for the infamous Watergate scandal. But how many of us remember that, prior to Watergate, he got caught up in another scandal over a suspect tax deduction?
In 1969, Nixon donated more than 1,000 boxes of his official papers to his presidential library and attempted to claim a $576,000 charitable deduction. This caused an uproar, and served to start turning much of the nation against the president.
Congress got involved, created an investigative panel and eventually disallowed the deduction. Nixon felt his strategy was legal, and voluntarily provided three years of income-tax returns to Congress for the panel’s review. This set the precedent for presidents—and presidential candidates—to submit their tax returns for public scrutiny.
This anecdote, and many more, are contained in a fascinating new book entitled All the Presidents’ Taxes, written by Charles Renwick, a Chartered Financial Analyst and Certified Public Accountant. Renwick’s goal is to expose readers to some of the more interesting stories of presidents, and presidential candidates, and their tax challenges.
But the book isn’t just an exposé of suspect tax strategies. The author highlights legal tax-cutting strategies that are used by our highest leaders, but that are also available to everyday taxpayers.
Part One consists of four chapters. The first provides a concise and informative overview of the history and construction of our tax system. The second chapter asks the question, “How can we assess a president’s taxes?” The author proposes four questions:
Renwick then adds a fifth question to help readers with their own taxes: What can we learn and borrow from presidents and presidential candidates? The author uses this framework to look at President Jimmy Carter; Senators John Kerry, Ted Cruz and Mitt Romney; President Joseph R. Biden, Jr.; and President Donald Trump.
Chapter No. 3 provides an excellent overview of two of the key underlying concepts in the tax code, namely nuance and context. Our tax code is riddled with nuance, especially when it comes to a business. The facts and circumstances of the tax situation provide the context to interpret the law.
A good example, which may impact some retirees, is the difference between a business and a hobby. The IRS has rules addressing this, but they’re open to interpretation depending on the facts and circumstances of the case. Hobbies can’t take tax deductions; businesses can.
For example, the regulations state that if you make money in three out of five years, you have a business. The author cites an example of a travel business opened in 2018. It lost money in the first two years due to startup costs. It then lost money in 2020 and 2021 because of the pandemic. Despite those losses, it’s still considered a business and qualified to deduct expenses.
Chapter No. 4 discusses the critical difference between avoiding and evading taxes. Avoiding taxes—taking steps to pay less than might otherwise be owed—can be a sound and legal strategy. We’re all free to structure our financial lives to take advantage of the tax code and thereby trim our taxes. For the average salaried employee, things like contributing to a tax-deferred 401(k) or health savings account come to mind.
Tax evasion happens in small and large ways. Failing to report income is common, and cash transactions are one of the methods employed to evade the taxman. Many businesses want to avoid the complexity and fees associated with third-party credit card companies. But running a cash business can be a big temptation to fudge your income.
Part Two consists of chapters five through 10. These chapters provide an in-depth review and analysis of Biden’s and Trump’s tax returns. The final two chapters address two important tax topics: fringe benefits and estate tax.
The fifth chapter analyzes Biden’s taxes in 2017 and 2019. Subsequent to his term as vice president, and prior to being elected president, he and his wife used an S Corp to legally reduce their tax bill. An S Corp strategy avoids payroll taxes on pass through income, and is something accessible to citizens who have rental or partnership income.
Trump has the most complex financial situation of any modern president. Chapter Nos. 6, 7 and 8 delve into three specific aspects of President Trump’s tax strategy. These chapters examine the use of deductions for business expenses, using a business to pay family members, and using depreciation in a real estate business. The author makes the case that these are common strategies used by business owners, and explains how the reader might take advantage of them.
The final two chapters are a brief discussion of how to use fringe benefits to provide tax-free income, and strategies to use favorable asset valuations to reduce estate taxes. Both chapters provide interesting background information and an assessment of how these strategies can drift into legal gray areas.
The author ends with a call to arms of sorts—to make it a legal requirement to disclose the tax returns of presidents and presidential candidates.
The reader can enjoy this book on a number of levels. The historical context and tax code philosophy are interesting and informative. The analysis of president and presidential candidate tax returns provide insight into each person. It also offers a glimpse into the political calculations that candidates make in deciding how much personal information to provide.
More important, the book prompts readers to think more deeply about the role of the tax code in our country and our lives. What should be taxed and at what rates? What’s considered a fair share? When does tax avoidance slip into tax evasion? These are important questions that affect all of us.
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.
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Bill & Hillary Clinton are still remembered for their used clothing donations to the Salvation Army that were overvalued by several hundred percent. Bill even itemized his used underwear on his handwritten list!
Rick, good review of a book that sounds like an informative read. The author certainly chose some lightening rod presidencies to illustrate his topics. It’s drawn my interest. Thanks.
I have a conflicted view of President Nixon. I was one of the last of the draftees in 1972 and was completing advanced individual training to be a quartermaster and my entire class at Fort Lee had orders cut to go to Vietnam when President Nixon changed our military direction and a troop reduction occurred. My orders were changed and I ended up serving in Germany. I remain grateful for not having to go to a combat zone. Nixon’s actions that led to him resigning were not reflective of a good leader and I was glad to see him go. I got lucky.
I see a similar parallel with taxes. Tax law should be fair in that the same income should be taxable income and the same expenses should be tax deductible regardless of how you organize your financial affairs. A prime example – Employer paid health care premiums are excludable from employee taxable income to a rank and file W-2 employee but the rule is different for a S-Corp greater than 2% owner, which is different for a C-corp owner employee, which is different for the business owners if the business is organized as a multi member LLC, which is different for a single member LLC owner or sole proprietor, which is different for employee paid premiums without any employer coverage, which is different if you have HSA savings, etc., etc., etc.
I do not expect I will ever see fundamental reform in our tax system. If there is no likelihood of fundamental change then some taxpayers will be just be lucky to be in a group where rules are beneficial to them, some will plan and take action using the current tax rules and change when the rules do to get a beneficial tax outcome, some will ignore tax rules and cheat on taxes and some will pay more in taxes because they are not in a tax beneficial group.
We could and should do better with the fairness our tax laws and rules. I am tired of the fight and now focus on actions, planning and changing my course when the rules do change. TINA is my gal.
William, thanks for reading and commenting. I’m a little younger, but i recall many people were conflicted in the 70s.I am often amazed and appalled at the complexity of our tax code. I recognize we live in a wealthy and complex society, but some of the features of the tax code make me scratch my head.
Thanks for summarizing the book for us. I remain astounded and appalled by the complexity of the US tax code. Filing my taxes in the UK took me about ten minutes and here I employ an accountant.
Thanks for reading and commenting. It often takes ten minutes to fire up TurboTax and open a return.
Yes, Nixon cleverly tried to donate papers for a tax deduction. He also set up the taping system for the same purpose. Had he not been so greedy, history might have taken a different turn.
Richard, thanks for reading and commenting. I continually amazed at the foolish things smart people do.
Interesting article, Richard. Will definitely read the book you referenced. We share a common interest in taxes as volunteer tax preparers.
Although I am no longer involved in tax preparation, my interest remains. I kid people by telling them I read the tax code just for fun.
I have another recommendation for a book HD readers might enjoy—The Sex Of A Hippopotamus: A Unique History of Taxes and Accounting—written by Jay Starkman.
The Wall Street Journal called it “the only readable book on taxation”.
I’ve been able to locate your recommended book through my library’s inter-library loan system.
“The Sex Of A Hippopotamus: A Unique History of Taxes and Accounting”. Sounds wonderful, and a good rating by WSJ, to boot. Thanks!
Majorie, thanks for reading, commenting, and the book suggestion. The title is so intriguing I have to check it out.
This is an important topic Rick. That is the difference between attempting to leverage the tax code to minimize taxes as I suggest we all do and cheating.
Political rhetoric often labels the super wealthy and large business as tax cheats and not paying their fair share. The reality is that according to the IRS, tax cheating is mostly done by average middle class Americans and small business who deal with cash transactions. Note the number of businesses now charging to use a credit card. That’s not only to avoid the transaction fees. It’s estimated that 40% of tips are unreported. It used to be 80% until the reporting rules were changed.
I just posted on my blog about this. It’s hard to convince people what they rather not believe.
People will always employ every legal or perceived legal strategy to avoid taxes, perhaps the real problem is the complexity of the tax code – and whose fault is that?
Another question is why are tips even taxed in the first place? It a voluntary gift, is it not?
It used to be, for good service. In the past most people tipped 10% which should have stayed the same because it was a percentage of the bill. The dollar amount of the tip would automatically increase with inflation. Over the years it’s become a way to shift pay increases, that the owner should’ve been giving their employees, to the customer and then pretend they have low prices. Thats why the “suggested” percentage is now up to 20% or more. I read once that in some Scandinavian countries, where wages are much higher for service jobs, they’ll get mad at you for trying to leave a tip. You’re implying they’re not paying their employees enough.
I suppose that middle class and small businesses that cheat are too unimaginative to write favorable tax code bills and hire teams of lawyers and lobbyists for their passage.
No doubt, but who do we blame, those who seek tax advantages or those who enable them and allow it to happen?
We should blame those who write the rules and those who do not enforce them. I believe we should follow the rules, and if the rules are nonexistent or ambiguous, we should try to work them to our advantage. That is not cheating. Not following clear rules is a violation and can be called cheating in some cases. As a former business owner, I expected my employees to work my rules to their advantage. If I crafted a rule poorly and they took advantage of it, good for them. I did not expect them to follow the “spirit” or my intent, but rather what was written, not what was left unsaid. It was up to me to revise rules that were incomplete or ambiguous.
Dick, thanks for reading and commenting. I have noticed the increase in businesses that charge a higher amount for a credit card purchase. We recently replaced our hot water heater. The firm – very reputable – gave a 3% discount for payment by check. It will be interesting to observe if this trend increases and what it will mean to average folk.
Most of us have rewards credit cards. Some provide cash rebates and the others give points. Why haven’t those been taxed yet? This is another unfair disadvantage for the poor who cannot qualify for one.
This is quite common in other countries, didn’t know it was catching on here.