Can Someone's Tax Returns Tell You His/Her Net Worth?

[FIREd]

My tax return would be a very poor predictor of my wealth because many of my assets do not generate any taxable income.

 

[footenote]

No, tax returns have no direct through-line to assets.

Interestingly, however, tax returns are often used to demonstrate a lack of sufficient legitimate income to support a given lifestyle.

It's common to see RICO investigations use tax returns to show a defendant didn't have nearly enough taxed income to support visible expenditures on cars, homes, etc. This can lead to evidence of money-laundering.

If I "poor-mouth" my tax returns and yet public records show I bought a couple of apartment buildings for all-cash, the tax returns could be valuable evidence that I was getting lots of cash some other way. If I can prove I came by the cash legitimately (ex: selling other assets), I would be fine. If I can't, maybe I'm eventually going to be found guilty of some unsavory underlying acts.

See also: Al Capone.

 

[joeea]

Can Someone's Tax Returns Tell You His/Her Net Worth?

I hope we can keep this non-political, but I often hear news reports that imply that looking at someone's tax returns would reveal his/her net worth.

What news reports have you read that focused on revelation of net worth?

I doubt you could directly determine net worth from a single tax return.

But of course there are lots of other points of interest in someone's tax returns.

Looking at our tax returns would definitely not give a hint of our net worth. We'd look pretty destitute actually.

Viewers could find out where some of your income originated. They could find out which lenders, from which countries, gave you loans that you are repaying. They could learn how much (if anything) you contributed to charity. And of course they could learn how much (if anything) you paid in taxes.

And they could compare all those to your public claims regarding your net worth, to see if they are in line or not.

 

[joeea]

On a somewhat related subject, can *any* CPA get access to your tax records without your permission?

No. But Congress can get access to anyone's tax records in certain cases.

 

[joeea]

Please enlighten me on this process. As a business owner, I would love this tax break.

First, hire plenty of expensive lawyers and aggressive tax accountants.
Then, follow their recommendations.

 

[kcowan]

What is the motivation behind the original question?

 

[ERD50]

Amazon not paying any tax on 10+ billion profit. Personal tax may not be as complicated, but if you own business, you can legally shift profits and not paying tax. So tax is very poor indicator of wealth.

Please enlighten me on this process. As a business owner, I would love this tax break.

First, hire plenty of expensive lawyers and aggressive tax accountants.
Then, follow their recommendations.

joeea, it doesn't take that at all. And - it is fair. Carrying losses forward is something I've done, and you might have done it too. Basic tax software will do it automatically, you might not even be aware of it.

Compare these two scenarios:


A) Say you sold stock at a $100,000 loss one year, and another stock at a $100,000 gain that same year, and had no other income (to keep it simple). The two sales net out to $0 gain. No taxes paid. Fair, right - no profit, no taxes?


B) Say you sold stock at a $100,000 loss one year, and had no other income . You don't pay tax on a loss, right?

The next year, you sold stock at a $100,000 gain, and had no other income. Over these 2 years, your net profit was zero. You are allowed to carry the $100,000 loss forward to net out the $100,00 gain. No taxes paid.

If you were not allowed to carry losses forward, "B" would have paid taxes on $100,000, while A didn't. The sales may have been just one day apart. That is not fair, IMO.

-ERD50

 

[kgtest]

My tax return would be a very poor predictor of my wealth because many of my assets do not generate any taxable income.

Precisely, and brand...how does one know the value of someone's "brand" via a tax return...ie L'oreal or Funduddle Corporation for instance.

 

[Andre1969]

I don't think they can be an accurate gauge of net worth, but a tax return can at least provide some pieces. However, sometimes that information can be corrupted, twisted, and taken out of context.

For instance, here's a little fiasco I recently went through with my family. My Granddad died back in late 2016. He had three sons. My Dad was living with Granddad, and taking care of him. The other two didn't help out much, and also thought of my Dad as a leech. Nevermind the fact that, without my Dad, Granddad would have gone into assisted living decades ago, and that would have eaten up his net worth most likely, so there would be no inheritance.

Anyway, Dad died in early 2017. When my two uncles were going through some paperwork, they found Granddad's tax returns from awhile back. One of them showed that Granddad made about $7,000 in a money market account, back in 2007 or 2008. Considering what MMs were paying at the time (2017), they assumed Granddad had well over $1M back then, and my Dad somehow managed to make it "disappear".

There's just one little inconsistency. Back in 2007-2008, MMs were paying 5%+. I had one, with Emigrant Direct. To get 7,000 in interest at 5%, you only needed $140,000. I tried explaining this to them, and it went in one ear and out the other.

I guess there are certain things on a tax return that will let people know you're well off, such as how much dividends, capital gains, etc show up. And if there's a big mortgage deduction, that's a sign you at least qualified for an expensive house. So, people could piece together and infer. But I don't think you can actually peg down an actual net worth number from a tax return.

 

[scrabbler1]

I doubt it, at least for me. Twice in my working years I reduced my weekly hours worked, so my wage income dropped, along with my income taxes. Investment income rose some in those years, so there was a partial offset. But my net worth rose a lot.


In my 1 years of ER, I have had some spikes in my income due to unusual cap gain distributions even though my NW didn't rise along with it. At best a very wea correlation.

 

[pb4uski]

On a somewhat related subject, can *any* CPA get access to your tax records without your permission?....

No.

 

[jetpack]

Yes, 100% in countries like Switzerland, Argentina, France, Spain, Netherlands, Norway, etc. with a asset tax or Wealth tax that requires you to report all your assets (and be taxed on them)

It's also a proposed tax in the USA.

 

[TromboneAl]

... Wealth tax ...
It's also a proposed tax in the USA.

[emoji44] [emoji47]

 

[Qs Laptop]

What is on Schedule K-1 forms? Don't people have to list the percent ownership of a partnership, LLC, or S-Corp on them? Also the profit and loss they received?

This might give someone a bit more information than can be gleaned from 1040's.

 

[GrayHare]

It's also a proposed tax in the USA.

That'll help drive up the price of gold, artwork, and similar.

 

[ziggy29]

Obviously we can get an idea sometimes, but not always. If someone is worth 10 million dollars but has most of it in stocks that do not pay dividends, or in muni bonds, and they live pretty simply and don't have much current income from investments, or if most of their wealth is in IRAs or 401Ks and they aren't withdrawing yet, then they will be the "millionaire next door" and you may not notice that an income of $100K or less belongs to someone worth many millions.

 

[Bir48die]

Nope. You can see that they have some means (property tax statements, 1099-B, etc) . If 99% of investments are tax deferred and no withdrawals then no. If you have the pile-o-cash as a mattress, no.

I am doing taxes for fun (?) and just inputted about 25 DIV forms so I’m guessing she did ok.

 

[Rianne]

This is the argument I get from said family members. Income has nothing to do with NW. So, we're on ACA. Subsidies and MAGI give clues of income. My DB is furious that his friend is on ACA with subsidies and is worth $M$. His friend just figured out how to make his income fit the subsidies. I guess I understand why those with big incomes are mad they aren't getting the ACA subsidies. Did I just start a fire?

 

[foxfirev5]

Somehow this thread reminds me of the folks on " American Pickers ". Maybe their asset plan isn't so off the wall. Preppers, pickers and hoarders, the new normal when assets are taxed.

 

[SecondCor521]

What is the motivation behind the original question?

I'm not the OP, but I'm guessing that it he is asking because of the occasional news reports where some members of the US Congress are seeking to obtain the President's tax returns in order to determine whether or not he may have committed either a crime or an impeachable offense.

As I implied earlier, one of those potential offenses might be if the President misrepresented his net worth in some business dealing. I guess the crime could be bank fraud. The impeachable offense, to paraphrase someone more famous than me, would be anything that 2/3 of the Congress votes for.

So I suspect the OP is trying to independently assess the likelihood of that approach producing results. I applaud his efforts to independently assess things. I will keep my opinions on the rest of it to myself.

 

[joeea]

joeea, it doesn't take that at all. And - it is fair.

Did you make $10B in profit?
And if so, aren't you using expensive lawyers and aggressive accountants?

 

[ziggy29]

Thank you to all for the discussion. The Moderator Team has decided that it has appeared to run its useful course.