Associated Press

Associated Press

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

The U.S. tax code is notoriously complex. Tax experts say the code is full of loopholes that may be available to everyone, but tend to benefit the rich.

Here are a few ways in which the wealthy can work within the law to lower federal income tax:

Net operating loss

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

CAPITAL GAINS

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.

Famed billionaire investor Warren Buffett, for example, has previously noted that he is taxed at a lower rate than his secretary. This is due in part to capital gains taxes.

He and his peers “make money with money,” 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.

Deductions

A more common way for higher-income people to lower their personal taxes is through deductions, such as donations to charity 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.

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

Buffett 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.