The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA with Jim Lange

Episode: 179
Originally Aired: October 5, 2016
Topic: The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA with Jim Lange

The Lange Money Hour - Where Smart Money Talks

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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  1. The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA
  2. Pay Taxes Later, Except for Roth IRA or Roth Conversions
  3. Death of the Stretch IRA Could Cost Your Heirs Thousands, Even Millions
  4. The Stretch IRA Is Not Dead Yet, But Be Prepared if It Does Go Away
  5. Roth IRA or Roth Conversion Can Be a Smart Move to Make Now
  6. Michael Sardar Explains How Trump Lost Nearly $1 Billion and Avoided Taxes
  7. Entire Loan Amount, Even the Borrowed Portion, Can Be Written Off as a Loss

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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at Now get ready to talk smart money.

1. The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA

Dan Weinberg:  And welcome to The Lange Money Hour.  I’m Dan Weinberg along with CPA and attorney Jim Lange.  In tonight’s special show, Jim is going to be giving you the most important advice offered in his newest book, The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA, which is due out November 28th.  Now, the book provides specific solutions to current tax issues regarding retirement plans, but perhaps even more importantly, it looks ahead to upcoming legislative actions that could reduce the value of your IRA.  These changes, something we call the “death of the stretch IRA,” could cost your family hundreds of thousands, or potentially millions, of additional tax dollars over your children’s lives.  Tonight, Jim will focus on the six main themes in the new book that will help you decide how to prepare for this likely change to the law and how to grow and keep more of your retirement nest egg.  But, as they say, that’s not all for tonight.  We’re also going to be talking a little bit about one of the big news stories of the past week: the revelation that Donald Trump, Republican nominee for president, claimed a nearly $1 billion loss back in the mid-1990s that could have allowed him to pay nearly zero in federal taxes for almost two decades.  So to talk about that, we’ll be joined by attorney Michael Sardar, a tax-controversy expert recently quoted in the Wall Street Journal about this Trump situation, and specifically, how the laws that Trump utilized actually work.  So a lot to cover tonight, and Jim, let’s get right to it.  Good evening.

Jim Lange:  Good evening, Dan.

Dan Weinberg:  Now, I talked about the six themes mentioned in the upcoming book.  The first one is one of your taglines, one of your favorite things to tell people, which is paying taxes later, most of the time.

Jim Lange:  Right, and before I get into the meat of the program, I do want to just express a thank you to Bob Dickey, who said, “Hey, you know something, Jim?  It’d be really nice if you talked about something that was very current, that might have to do with the election.”  And what I’m going to talk about, which is a potential change in the law, is very, very likely to happen if Hillary Clinton is elected.  So without taking sides on who I or you or this station wants, if you think that Hillary is going to be elected, then the advice that I’m going to be giving is going to be particularly appropriate, and at least the last that I looked at it looked like it was around a 75 percent likelihood.

But anyway, Dan, you’re right.  So we’re going to start with some basics, and then I’m going to talk about what the new law would look like, what the old law looks like, how devastating it will be to your family and some of the fixes for that.  But why don’t we go to some of the most important concepts of the book, and it’s a new book.  It’s going to be coming out in November, and if people are actually interested in a preview, we’re actually giving away a digital copy of my existing book if you go to

2. Pay Taxes Later, Except for Roth IRA or Roth Conversions

But anyway, why don’t we get to the meat of the program, and the meat of the program starts with actually one of the most important concepts in retirement and estate planning, which is “Don’t pay taxes now, pay taxes later, except for the Roth IRA.”  I’m going to say that again because it’s so critical, and so few people get this: Don’t pay taxes now, pay taxes later, except in the case of the Roth IRA and Roth IRA conversions.  This concept can be applied in the accumulation stage, so you listeners who are still working and you’re putting money into your retirement plan in the long-term hopes that, when you do retire, you’ll have sufficient funds to do whatever you want for the rest of your life, this is very appropriate.  Don’t pay taxes now, pay taxes later, except for the Roth.  For other listeners who have perhaps already retired, and they are looking to make their portfolios and their existing resources last as long as possible, don’t pay taxes now, pay taxes later also applies.  And finally, when you are planning for your estate, I’m also going to say the same concepts  ? don’t pay taxes now, pay taxes later ? also apply.  So this concept is going to be very important for really everybody, and what I’d like to do now is to go through each one of the stages, that is the accumulation stages, the distribution stages and the estate-planning stages.

All right, so starting with the accumulation stages.  Let’s say that you have two people, and they earn the identical amount of money, and they have identical investments, and they both have access to a 401(k) plan, but their employer’s a little bit of a cheapskate and doesn’t contribute anything to their 401(k) plan.  So there is access to a 401(k) plan, but the employer isn’t contributing any money.  So, does it make sense in that situation to contribute money to a 401(k) plan, or does it make sense to try to accumulate money outside the 401(k) plan?  Well, some people might say, “Well, gee, I’m not really in love with all the investment choices inside the 401(k), so therefore, I will invest outside the 401(k).”  But let’s just say, for discussion’s sake, that those two investments are identical, that is inside and outside the 401(k).  Basically, the numbers are ? and this is all peer reviewed, in the event that anybody wants to check my math, and all of this is part of the book Retire Secure!, again, which can be found for free on my website at ? it will show that the difference between somebody who is, even let’s say at age 30, even putting in, let’s say, $5,000 a year, over their career, will be the difference between them being broke and them having well over a million dollars.  So the idea of contributing money to a retirement plan, and remember, when you contribute money to a retirement plan, you’re not paying income taxes now, you’re paying taxes later.  So that is a very important concept in the accumulation stage.

Now, let’s go to the distribution stage.  So let’s assume, for discussion’s sake, that you are now retired, and you basically have ? let’s keep it simple ? and maybe you have an income from Social Security, although I’ll talk about that a little bit, and I’m actually going to, in most cases, recommend that the primary wage earner holds up until age 70 to collect Social Security, and I know a lot of people are turning their heads right now and saying, “Oh no, I sure hope he’s wrong,” but unfortunately, I am not wrong.  But anyway, let’s say that whether you’re collecting Social Security or, better yet, holding off on it, that you ultimately have two chunks, or two types, of assets.  One is your IRAs or your retirement plans, or your 403(b) or your 401(k) or your SEP or your KIO, but basically a type of money that no one has yet paid the income tax on.  And then, let’s say the other chunk is what I would call “after-tax dollars,” money that you already have paid the income tax on.  Which dollars should you spend first?  Well, let’s go back to our mantra: Don’t pay taxes now, pay taxes later.  If you withdraw money from the IRA, it’s going to cost you roughly $1.40 to spend a dollar because you’re going to have to pay 40 cents in income tax, which means your portfolio is depleted by $1.40, meaning that 40 cents that you paid in income tax is no longer available for investments.  If, on the other hand, you say, “Well, gee, I’m going to spend the money that I’ve already paid tax on,” with the exception of capital-gain money, which even if it is there, is taxed at maybe zero or 15 percent, you’re only taking out a dollar for every dollar that you’re spending, leaving that additional 40 cents in for investments.  Well, 40 cents doesn’t sound like a lot, but what if it’s hundreds of thousands of dollars, and basically, over time, even starting as late as age 65, there’s a several hundred thousand dollar difference of where you will be just 20 years after you start that pattern.  So just think about that.  You have two people with identical amounts of money, they each have IRA money and retirement-plan money, they each have what I would call “after-tax dollars,” one spends his IRA and retirement plan dollars first, the other one spends his after-tax dollars first, and in 20 years down the road, there’s a couple hundred thousand dollars difference.  It is really significant, and it is mathematical proof that, subject to exception, and the main exception being Roth IRA conversions, by the way, but subject to some exceptions, don’t pay taxes now, pay taxes later, even in the distribution stage.

All right.  Now, I did say with the exception of Roth IRAs and Roth IRA conversions, and I’m not going to have enough time tonight to do a comprehensive discussion of Roth IRAs and Roth IRA conversions.  By the way, I do cover this much more in-depth in my live workshop, and I think we have one coming up at the end of October, which is in Squirrel Hill, which I think is very important for people who are either close to or already retired, and I go into Roth IRAs in much greater depth, but what I will tell you is the math on it, and again, you have to go through all the assumptions to do this properly, but the math on it, if you understand the concept of purchasing power, and again, we don’t have enough time to go through that concept, but the math on it is that you can be even just 20 years after you convert as little as $100,000, that you could be $50,000 better off, and if you live into your 90s or beyond, the difference can be maybe $200,000 or $300,000 if you make a Roth IRA conversion compared to if you don’t.  So that is the exception: Don’t pay taxes now, pay taxes later, again, except for the Roth IRA and Roth IRA conversion.

All right, so basically, that kind of is an introduction to the most important concept of what I’ll say what is new.  So, what is new?  This is what happens to your IRA after you die, OK?  So I’m going to be a little bit morbid here and assume that you and your wife have a combined IRA of, let’s say, a million dollars, and let’s say that you die and you leave your IRA to, let’s say, your children equally.  And let’s say, for discussion’s sake, that at your death, your children have, according to the actuarial tables, let’s say, a 33-year life expectancy.  What would happen is they would be required to take out 3 percent.  How do I get 3 percent?  I go to (IRS) Publication 590.  I look at the factor for their life expectancy.  Let’s assume that the factor is 33 years.  I take the 33-year factor, I divide it into the balance as of December 31st of the prior year.  So 3 percent into, let’s say, a million dollars would be $33,000.  That is the minimum required distribution of the inherited IRA.  And remember, nobody has yet paid income taxes on this money.  So if your children are smart, they will do the same thing that you did after you reached age 70, which is, if you could afford it, you only took out the minimum required distribution of your traditional IRA because you didn’t want to pay taxes before you had to.  Well, I want to keep this same tax-deferral party alive even after you’re gone.  So, what happens the next year?  Let’s say that the investment earns 5 percent or 6 percent, but you only took out 3 percent for the distribution.  So now, the balance is higher.  But now, the divisor, instead of being 33, becomes 32.  So the distribution is a little bit higher.  What happens the year after?  Well now, the divisor goes down by one year, so now you have 31 divided by the balance, which is continuing to grow, et cetera, et cetera, et cetera.  So ultimately, you know, just a million dollar IRA, depending on the age of the beneficiary, the total distributions under today’s law can be easily several million dollars, and if you leave it to a very young beneficiary such as a well-drafted trust for the benefit of a grandchild or grandchildren, it can really just be a huge, huge benefit.  During the workshop, we actually go through some of the math, and I have charts and graphs, and, let’s say, teaching aides to make the concept a little bit easier.

3. Death of the Stretch IRA Could Cost Your Heirs Thousands, Even Millions

But anyway, so here’s ultimately what the new law is.  Let’s say you die with a million dollars in your IRA.  You and your spouse die with a million dollars in your IRA, you leave it to your kids, the new law, and again, it hasn’t passed yet, but relating this to the election, if Hillary Clinton is elected, you know, virtually all the IRA experts have a very enormous dread that this law will pass, called the death of the stretch IRA, and the way it will work is that your children will have to pay income tax on the entire IRA instead of over their lifetime within five years of your death.  Now, let’s think about that.  They’re going to have to come up with income taxes on a million dollars of income within five years of your death.  If Hillary is successful in raising tax rates on the wealthy and they have to add a million dollars to their existing income, even if they play some games to time it right, it’s going to be very hard for them to pay anything but a very high tax rate on that.  So even if we end up with, let’s say, a $400,000 tax, then they might just be left with $600,000.  So this is literally cutting back your inheritance by a third, and this is a brutal, brutal hit on your estate.  So the question then becomes “OK, this isn’t law yet, but it’s very likely to become law.  What are some of the things that I should do about it?”  And this is a critical, critical issue.

Dan Weinberg:  Tonight, Jim is talking about how to plan for potential law changes that could cost your family hundreds of thousands of dollars or more.  The strategies are outlined in Jim Lange’s brand new book, The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA, which is due out November 28th.  Now Jim, could you now quantify the difference for the children of the IRA owner between the existing and the proposed law?

Jim Lange:  OK Dan, I’ll make it personal.  Let’s say that your parents have a $1 million IRA.

Dan Weinberg:  OK.

Jim Lange:  All right?  And let’s say that they die and that you are the sole beneficiary of their IRA, and they die with the existing law in place, and you get to use what is called the stretch IRA, and let’s just say, for discussion’s sake, that you are 46 years old at their death, and you take the advice that our office would give you, which is to continue the stretch IRA, and you actually save the money because you looked at that as part of your savings.  Given certain reasonable assumptions, you would have basically about $2.5 million by the time you’re 80 years old.  If, on the other hand, your parents die one day after the effective date of this new law, instead of having $2.5 million when you’re 80 years old, you would have nothing.  Which one sounds better to you, Dan?  Having $2.5 million or nothing?

Dan Weinberg:  I’ll go with door Number 1!

Jim Lange:  So this is really a serious thing, and for me personally, all right, I’m an estate attorney who has done roughly 2,400 estate plans.  My clients tend to be what I would call IRA heavy, meaning that the majority of my clients have more money in their IRAs and their retirement plans than they have outside their IRAs and their retirement plans.  And I have been planning to do this stretch IRA for the vast majority of the 2,400 estate plans that I’ve done, and now, this stretch IRA is in serious jeopardy.  So it is awful for me, but I’m also trying to warn the world.  Now, by the way, I warned the world about Roth IRAs even before they came, and a lot of people that listened got on the bandwagon early and are today literally hundreds of thousands or even millions of dollars better off, or will be over their lifetimes.  I also correctly anticipated some of the changes in the stretch IRA.  This was back in 2001.  And in both cases, I wrote peer-review articles on those.  Now, with this proposed law, I wrote two additional peer-review articles.  They were published in Trusts & Estates magazine.  By the way, both of those articles are available at no cost on my website, again, and as a result of the articles, I was invited to speak at a very prestigious estate-planning conference in San Diego.  And actually, what I’m doing with my live workshops, the next one being in Squirrel Hill in late October, is I am giving kind of the highlights.  But anyway, this is a very serious thing, and the difference between Dan, you having nothing and you having $2.5 million is pretty serious.  And if we had an even younger beneficiary, which sometimes we would do if there were sufficient assets, or you actually just took a chunk of your parents’ IRA and left it to a well-drafted trust for the benefit of your very young children, it would be worth literally millions of dollars to them.  But that’s likely not the case.

4. The Stretch IRA Is Not Dead Yet, But Be Prepared if It Does Go Away

So the question then is, what should you do about it?  Well, let’s start off with the premise that the law has not yet passed yet, so right now, it’s best to be nimble.  In medicine, they say ‘First, do no harm.’  First, don’t do anything that if the law doesn’t change, that you won’t be hurt.  So you want to have flexible estate planning.  Interestingly, the Lange’s Cascading Beneficiary Plan, which is our primary estate plan that we’ve been doing for close to 25 years now, is actually the perfect vehicle.  So if you are one of my existing clients and we’ve already prepared your wills and trusts, there’s a good chance that what you should do, at least between now and the time that they pass this law, is nothing, in terms of redrafting your wills and your trusts because we have already drafted very, very flexible estate-planning documents for you.  That type of plan is typically appropriate only for traditional married couples that I call the “Leave It to Beaver” couples: original husband, original wife and same kids.  So that’s the first thing that they should consider doing.  And again, I’ve talked two hours just specifically on that estate plan.

All right, now the other thing that we have looked at is some gifting, some Roth strategies and a new type of trust, actually it’s an old trust but a new use called a Charitable Remainder Unitrust (CRUT).  And why don’t we go through some of the math of that, and you might think, “Oh no! Jim’s going to try to talk me into leaving money to charity!  Charity’s great, but I’m more interested in providing for my children,” which is what most people are.  Even charitable people tend to leave a lot more money to their kids than a charity.  But let’s assume, for discussion’s sake, that you’re not all that interested in charity, but you wouldn’t mind seeing money go to a charity, but you would much rather have the money either go to your kids, Number 1, kids; Number 2, charity; IRS Number 3 and last.  How can we minimize the amount going to the IRS?  Now, let’s go back to Dan inheriting a million dollars from his parents under, let’s assume, the new rule, which is proposed, which we think is going to happen, particularly if Hillary wins the election.  So, Dan, you’re going to have to pay income tax on a million dollars.  No matter how it’s said and done, it’s probably going to end up costing you about $400,000 in taxes.  So you only have $600,000 left.  Now you invest that $600,000 and you’re earning dividends and interest on $600,000, all right?  It would’ve been a lot better under the old law where you were, in effect, earning income and dividends on the million dollars.  But let’s say they pass this law.  What are some of the alternatives?  Well, one alternative is something called a Charitable Remainder Unitrust.  So how would that work?  What your parents would do, and I only recommend that they do this if and when and after they change the existing law, so I’m not saying that you should go out and do this now, but if they do change the law, I am saying you should do it, but I’m warning people about it now because frankly, if and when they change the law, you should probably attend to this relatively quickly if you are a good candidate for this charitable-remainder trust.  And the way it’s going to work is instead of getting income on the $600,000 and having access to the $600,000, Dan, you would have access on the income of the entire million dollars.  Now, without getting too technical, you would end up getting the present value of 90 percent and the charity would end up with the present value of 10 percent.  But here’s the beauty of it: The income on $100,000, depending on how long you live, would be more beneficial than having the $600,000 outright, unless you needed a huge burst of cash.  But let’s say that you’re being prudent, or your parents aren’t even going to give you a choice.  They’re going to make you be prudent and only give you the income on the million dollars.  So are you better off having the income on a million dollars, or are you better off having the $600,000 outright?  And the answer to that question is ? I’m going to sound like an attorney ? it depends.  What does it depend on?  It depends on how long you live after your parents die.  If you die two years after your parents die, and you got the income for two years and the charity got everything else, your family didn’t do that well.  If, on the other hand, you live into your 80s or 90s, you will literally end up with an additional $500,000 or $600,000 or even more over and above what you would’ve received if you had just received the entire chunk of money ? the million dollars ? paid income taxes on it, be left with $600,000, invest that money, compared to getting the income on the full million dollars.  So, again, the difference over your lifetime if you live into your 80s and 90s could be literally $500,000, $600,000, $700,000, depending on interest rates.

So then, you might say, “Well gee, what is the break-even point?”  And again, depending on what assumptions you make, the break-even point is age 72.  So Dan, do you think you’re going to make it to age 72?

Dan Weinberg:  I hope so.

Jim Lange:  Well, I hope so too, and if you do, given the assumptions that I have here, which I don’t have the time to go through, and if, and only if, the new law passes, you will be substantially better off, and maybe by hundreds of thousands of dollars, if your parents establish a charitable trust where you get the income, and then, at your death, it (the remainder) goes to charity.  Oh, by the way, as a pure bonus that I didn’t even include in this analysis: The charity gets $180,000.  So that is another good thing.

Dan Weinberg:  We are talking about The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA, Jim’s new book coming out next month.  In this new book, Jim Lange reveals strategies that can maximize your retirement plans and help you keep more of your money out of Uncle Sam’s hands.  You can get much more information on the book, and you can stay up-to-date, get notifications about when it’s ready to be shipped, you can go to  Right there on the front page, you’ll see “Coming Soon,” and then you’ll see “Details” and “Bonus Offer” right at the bottom, and you want to click on that.

5. Roth IRA or Roth Conversion Can Be a Smart Move to Make Now

Now, you talked about flexible estate plans, and you talked about the Charitable Remainder Unitrust, but earlier you mentioned Roth IRA conversions and gifts.  Can you talk about those two?

Jim Lange:  Yeah, so Roth IRA conversions, which I’ve been a big fan of, and by the way, I should clarify the difference between my reputation and what the practice is.  I have a big reputation as a Roth guy.  “Oh, Jim Lange, he loves Roth IRA conversions.  You go to his office, they’re going to recommend big Roth IRA conversions.”  And that’s not completely wrong, but I would prefer, and what I think is more accurate, is the very highly skilled CPAs at Jim Lange’s office analyze your particular situation, and though everybody is a snowflake and everybody’s different, there’s a very good chance if there’s a very substantial opportunity in the event that you do make a series of Roth IRAs and Roth IRA conversions.  So we crunch the numbers and then we make our recommendations.  But interestingly enough, one of the things, if this new law passes, is that your kids are really going to get creamed with taxes if you leave them a significant traditional IRA.  One of the things that we have found is a good strategy, whether they change the law or not, now remember, with the CRUTs, the flexible estate plan, good if they change the law or not.  CRUTs, I said, only do that if they change the law.  Roth IRAs and Roth IRA conversions, they are a terrific thing whether they change the law or not.  So this is something that I think a lot of people should be looking at, and again, we have peer-reviewed numbers showing that if they do change the law and they do kill the stretch IRA, then if you had made a series of Roth IRAs and Roth IRA conversions that both you and your children will be significantly better off.

Then finally, the last strategy that people should consider using is some variation of gifts.  Now, this is only if you can afford it.  So if you’re struggling to make it, or even if your estate is … and I don’t want to give a number because people have different spending amounts, but if you can afford a gift, it might make a lot of sense to take some money from your IRA, pay tax on it, and use that money to make a gift, and particularly if the gift that you’re making is going to be in a vehicle that has tax-free growth.  So, for example, you could take some money from your IRA, pay tax on it, have some money left, use that money, and tell your children to use that money for a Roth IRA for themselves.  You could also say, “OK, I’m going to take some money from my IRA, I’m going to pay the tax on it, I’m going to take what is left and I’m going to, maybe let’s say 1 or maybe at best 2 percent of the IRA and use that to purchase life insurance.”  The other possibility was you could take some money from your IRA, pay tax on it, and invest it in a 529 Plan, which is an education fund for your grandchildren.  Depending on your own situation, any one of those strategies could end up saving a significant amount of money.

And then I’m going to come to what I would call my favorite, which is a combination of a whole bunch of strategies.  You might want to combine the flexible estate plan, the series of Roth IRA conversions, the series of gifting and, depending on how you combine and, depending on your own situation, you can literally save your family tens of thousands, maybe hundreds of thousands, maybe even millions of dollars in taxes.  Some of these strategies are things that you can do right now, such as Roth conversions and gifting, some of them are things that I think that you should, let’s say, be prepared to jump on if and when the law changes, which is this Charitable Remainder Unitrust.  But I think that being proactive and recognizing that this brutal tax literally could come, and particularly if you have a significant IRA, retirement plan, 401(k), 403(b), that this is very important.  Again, I am offering … I have two articles on it on my website at, as well as if you sign up for an early notification.  We have all kinds of bonuses, including a digital copy of my last book.

6. Michael Sardar Explains How Trump Lost Nearly $1 Billion and Avoided Taxes

But I know that Donald Trump and his taxes are in the news today, and I always want to be current and I always want to have literally the top experts in the field inform our listeners and readers and blog watchers about what is going on, and they have heard, “Oh gee, Donald Trump lost $915 million in 1995.  How is that possible?  What are the implications for that?”  So it was actually literally today I got the idea, “I know, I’m going to ask the top tax expert in the world, a guy named Sid Kess, about this,” and Sid said, “Hey, you know something?  I’m not your guy.  You want to talk to Michael.”  And he gave me Michael’s work number.  I read some of the things that Michael had written.  He’s clearly the guy to talk about it.  I contacted Michael.  He said that he would be more than happy to appear on tonight’s show, so I’m going to bring him on and interview him for a few questions regarding Donald Trump’s tax return.

Dan Weinberg:  That’s right.  We are welcoming attorney Michael Sardar, a tax-controversy expert, recently quoted in the Wall Street Journal about the Donald Trump tax situation.  Michael is with the law firm of Kostelanetz & Fink, LLP.  His practice focuses on all stages of civil and criminal tax controversies.  He represents taxpayers before the IRS, state tax authorities, the Department of Justice and local prosecutors.  So, Michael Sardar, welcome to the program.

Michael Sardar:  Thank you.  It’s great to be with you, Jim.

Jim Lange:  Well, it’s great to have you.  So let’s say that the tax return, even though we didn’t see the federal return, but we did see a state return, and nobody on the Trump campaign has denied that it is accurate.  Let’s assume that the number, and I believe it was about $915 million, was shown as a loss on Donald Trump’s tax return, and then the media says, “Hey, he doesn’t have to pay taxes for 20 years.”  How does that work in terms of carry forward, carry back, and is that accurate that it is possible that that might save him from paying taxes for 20 years?

Michael Sardar:  So I’ll start off by answering the latter part of your question.  Yes, it is accurate that, based on the information that’s out there now, it is possible, certainly no one’s going to know for sure unless he releases more information, but it is possible that having such a large net operating loss appear on his 1995 return would’ve allowed him to legally not pay taxes for many, many years, essentially allowing him to shelter about that much income going forward and perhaps going backwards.  And the way this works is the net operating loss that’s on the return for 1995, what that means is at the end of the day, taking into account all of his business activities, he lost, for tax purposes, $915 million, and the tax law allows you to take that loss and apply it towards future income so that if you make pretty much that amount at some point over the many years going forward, and in fact allows you to carry it back.  And the rules that would’ve been in place in 1995 would’ve allowed him to carry back that loss for a couple of years and carry it forward for 14 more years.  The rules that are in place today allow you to carry it back for two years, then carry it forward for another 20 years, and the thinking behind all of this that applied to the average, you know, sort of mom-and-pop business or average Joe, if you have a business that has made money in one year, you know, made money in yet another year, and then the third year comes around perhaps because of the recession, because of financial difficulties in a particular industry or just bad luck, you’d lose money in that business, meaning that you’ve put out expenses, you’ve paid your employees, you’ve paid the electric bill, but you haven’t sold enough widgets, or whatever it is that you do, to cover those expenses, and now you’ve lost money.  Yet here, in the prior years, and perhaps in a future year, you’ve made money.  And so, in fairness, the Internal Revenue code allows you to take that loss and say, “Hey, I’m going to apply it to these two years before where I made money, and shelter that so that I will perhaps get a refund, or apply it to future years so that money that I will be making in the future won’t be taxed.”  And that’s what we’re seeing here.  Ordinarily, it doesn’t raise that many eyebrows, but when it’s a billion dollars, or nearly a billion dollars, it certainly does.

Jim Lange:  Michael, I’d just like to do the math for one minute for our listeners.  So let’s say that you have a very steady business and you’re making $100,000 a year.  So your total income is going to be, say, $300,000 for the three years and your tax bracket will be relatively low.  Example Number 2 is you make $200,000 one year, $200,000 another year, and then the third year, you lose $100,000.  So over the three years, you still have earned the same amount of money.  So the idea of being able to take your $100,000 loss and carry it back, you might approximate the same tax as if you made $100,000 in even installments.  Is that essentially what you’re getting at?

Michael Sardar:  That is essentially what this allows, but actually, you raise a very interesting point there by referring to the tax rate that you’d ultimately be paying.  For a very wealthy individual, the tax rate likely is going to be at the high end regardless, and so this wouldn’t really matter that much.  You’re going to end up paying the same level of tax whether you pay that highest margin or rate at same amount of income over two or three years or over five years, it won’t make much of a difference.  But at the lower level of an average individual, you don’t necessarily have the luxury of doing that.  And So what ends up happening is you may have deductions that are outside of these business losses that generate NOLs (net operating losses), that perhaps would allow you, in one year, to have greater deductions in a year when your income is pretty low.  So those deductions aren’t all that valuable to you because your tax rate is low.  In another year where your income is much higher, it would be nice if you could take those deductions and say, “Hey, I’m going to spread them out so that I even out my tax rate, so that I will have about the same income and therefore pay about the same tax rate in different years.”  And for the average person, you really can’t do that because most of the personal deductions that you’re allowed to take on your tax return are limited to that year.  So, for example, your home mortgage interest, which is a very common deduction for most taxpayers, that’s just what you paid in that year, and if there’s more of it or it would be more beneficial for you to carry it back or forward, that’s not really an option.  Similar with if you itemize your deductions and you report your state income tax as a deduction, you can’t move it back or forward to the advantage of paying lower taxes.  When you have a business loss, you have a lot more flexibility, and that’s what you’re seeing here, I think, a little bit.

Jim Lange:  OK, well, let’s talk about a business loss.  So let’s assume, for discussion’s sake, that Don had a pretty bad year, either in ’95, or that might have actually been a loss carry forward, maybe a little bit before that, and I don’t think that he wrote a check for $915 million of business expenses and lost it all.  He might have written a check for $5 million, $10 million, even $100 million, but how can you write a check for $5 million, $10 million or $100 million and then show a $900 million or a billion- dollar tax loss?

7. Entire Loan Amount, Even the Borrowed Portion, Can Be Written Off as a Loss

Michael Sardar:  Well, that’s one of the, I think, things that gets a lot of people upset about.  What they’re seeing here is that, you’re right, most people don’t think that he actually lost financially $915 million, and he likely didn’t.  What this likely came from is the fact that in connection with his real-estate businesses, he would’ve taken out very large loans, and when you take out large loans in connection with a business enterprise, and you guarantee them personally under the tax laws, and there’s all sorts of exceptions and complications, but to simplify it, under the tax laws, you now have a basis of that loan amount in that business venture, or in that asset, and if it goes under and you either abandon it or lose it because you need to give it back to the bank or need to sell it for pennies on the dollar, the loss that you can recognize for tax purposes is the entire amount of what you paid to buy it, even though you only paid a fraction of that and actually borrowed the rest of the money.

Jim Lange:  All right, so let me again bring it down to numbers.  Let’s say that Donald Trump bought something for a billion dollars and he put a hundred million in and he borrowed $900 million, all right?  And he then went bankrupt.  You’re saying that he can, in effect, deduct the entire thing, and even though he doesn’t have to pay his creditors, and even though he doesn’t have to come up with anything more than the initial amount that he lost, he can still deduct the entire loss, even though it didn’t cost him anywhere near that much out of his pocket, and there is no such thing as, in effect, depreciation recapture when there is a bankruptcy, at least according to the laws in the mid-’90s.  Is that correct?

Michael Sardar:  That is pretty much correct, and this is adding perhaps some speculation that we’re all uncertain of, but there is speculation that the reason this worked out for him so well is because of what you just raised, the depreciation recapture.  So, ordinarily, when someone has real-estate assets and they depreciate then year after year, eventually, when you sell the asset, it catches up with you.  Let’s say the average person may have bought a two or three unit building and they rent it out each year, and they bought it for $300,000, and over a period of many years, they depreciate that building down to where they’ve now depreciated to zero.  When they sell the building, they perhaps bought it for $300,000 and naturally, you think well, they bought it for $300,000, they sold it for, let’s say, $400,000, their gain is $100,000.  But if they’ve depreciated the entire cost of the building that when they sell it for $400,000, the entire $400,000 is gain, and based on the timing of what happened here, this was just about as Donald Trump exited general real-estate business and went into licensing his name and other activities that would not have been in the real-estate arena.  And so the real-estate assets may have lost the depreciation, rather may have had some depreciation issues because so much of it had already been ran off, but it wouldn’t have been really his problem anymore, and ultimately, if he had ordinary income in those years, this huge loss would’ve been able to absorb a lot of that income regardless of the depreciation.  But getting back to your point, under the law as it existed then, the depreciation wouldn’t have even been a problem to begin with because the law did allow you to do exactly that.

Jim Lange:  Well, Michael, you have been terrific on this point.  I wish we could go into this further.  Unfortunately, we are constrained by time.  I do want to put in a good word for the work that you do.  Dan, can you give Michael’s contact information?  Because we do have a national audience, and it sounds like Michael’s the guy to go to when there is, let’s say, a tough tax problem.

Dan Weinberg:  I sure can.  Michael Sardar is an attorney with Kostelanetz & Fink, LLP, and you can find him on the web at

Jim Lange:  Well, again, Michael, thank you very much for clarifying some of this information for our listeners.

Michael Sardar:  It’s been a pleasure, thank you.

Dan Weinberg:  And Jim, we’ve been talking, of course, earlier, before we talked to Michael, about your new book.  Anything else you’d like to add or sum up about the book, which is coming out the end of November?

Jim Lange:  Well, I think, more important than the book is that we have a very serious new law coming that could really undermine significantly the many years that you have worked to accumulate money in your IRA and your retirement plan.  Now and in the aftermath of assuming this law does pass is the time not to just sit and do nothing, but to be proactive.  I’ve suggested some ideas during the program because I really wanted to actually give some meat to this.  I do encourage people to go to my website, sign up for early notification for the book.  We have some very nice bonuses  ? I think there might be a little mechanical problem right now, but that’ll be fixed in a day or two ? including a digital version of my old book, Retire Secure!  By the way, not so old, just in 2015, which sells for $24.95.  That’s my flagship book.  But also, I would encourage listeners to come to the workshop where I explain this in much greater detail, and, if appropriate, take advantage of our offer for a free consultation.

Dan Weinberg:  And Jim mentioned the website.  You can get to that special offer.  Go to  Right there on the middle of the page, you’ll see a “Details and Bonus Offer” under the picture of the new book, and you can see the special offer there.  Special thanks as always to the Lange Financial Group’s marketing director, Amanda Cassady-Schweinsberg, and to KQV’s Alexandria Chaklose.  I’m Dan Weinberg.  For Jim Lange, thanks so much for listening and we’ll see you again for another edition of The Lange Money Hour, Where Smart Money Talks.