Florida Sen. Rick Scott — the Republican target of President Joe Biden’s State of the Union criticism about potential Social Security and Medicare cuts — quickly released an ad that took aim at Biden.
Biden “cheated on his taxes and got away with it,” Scott said in the ad, which he announced Feb. 7 via tweet. “Biden improperly used a loophole to dodge half a million dollars in taxes that should have gone to Medicare. Now that Biden has ripped off Medicare for half a million dollars, he wants to close the loophole and raise your taxes.”
Biden’s State of the Union swipe focused on Scott’s 2022 proposal to downsize federal government by phasing out all federal legislation within five years and requiring Congress to newly pass any laws they want to keep. A sentence in Scott’s proposal about sunsetting federal programs doesn’t explicitly mention Medicare or Social Security, but both would seem to be included since they were created by federal legislation.
Scott, who is running for re-election in 2024, timed the ad to coincide with Biden’s visit to Tampa, Florida, where Biden discussed his plans for Social Security and Medicare.
Here, we will fact-check Scott’s claim that Biden “cheated on his taxes and got away with it.”
We found that on their 2017 and 2018 joint tax filings, Joe and Jill Biden used a strategy to lower their tax bill that some people have criticized and called a giveaway to wealthy taxpayers. Although tax experts consider its use to be an aggressive interpretation of tax law, they said the strategy is legal, relatively common and previously used by other politicians.
We contacted Scott’s campaign and did not receive a response.
How the Bidens used a legal tax loophole
Scott’s ad cites a July 2019 Wall Street Journal article that found the Bidens formed S corporations, a type of special taxing entity, and routed income from books and speeches through the corporations. Doing so might have saved them up to $500,000, the article estimated, because it allowed the couple to avoid paying 3.8% in taxes that fund Medicare. If the income had not been routed through corporations, it likely would have been treated as personal income subject to payroll taxes, which includes funding for Medicare.
Taxpayers who own an S corporation can legally avoid the 3.8% in taxes as long as the corporation pays them “reasonable compensation” that is subject to payroll taxes.
However, tax experts say that the definition of “reasonable compensation” is subject to interpretation. In 2017 and 2018, the Bidens’ S corporations reported $13 million in profit that wasn’t subject to the 3.8% tax, while allocating less than $800,000 to the Bidens as “compensation.” If the $13 million had been reported as personal income subject to the 3.8% tax, the Bidens would have owed an estimated $500,000 for Medicare funding.
The Bidens are not unique in using S corporations, a strategy informally called the “Gingrich-Edwards” loophole. Its moniker comes from two presidential candidates — former Rep. Newt Gingrich, R-Ga., and former Sen. John Edwards, D-N.C. — who used the tactic to reduce their tax liability.
When Biden left the vice presidency, the couple’s income rose for two years, to about $15 million over 2017 and 2018, including from Joe Biden’s book about his late son Beau. Overall, the Bidens paid $3.7 million in taxes in 2017 and $1.5 million in 2018.
Steve Rosenthal of the Urban-Brookings Tax Policy Center said he considers using an S corporation this way an “aggressive” strategy.
“Many view routing income for services through an S corporation to save Medicare taxes as a ‘loophole,’” he said. Rosenthal added that former President Donald Trump apparently also used this loophole.
Rosenthal expressed skepticism that the amount the Bidens allocated as compensation was reasonable. But he said he would not describe Biden as a “tax cheat,” and he said what the Bidens did was far short of illegal.
Rosenthal also drew a distinction between Biden, who willingly released his tax information to the public, and Trump, who fought a multi-year legal battle to shield his tax information from the public. “Biden did not hide anything, which, to me, is important,” Rosenthal said.
Kyle Pomerleau, a tax expert at the conservative American Enterprise Institute, agreed that there is leeway in the use of S corporations, and “taxpayers use that leeway to legally avoid taxes.”
Pomerleau agreed with Rosenthal that Biden’s tactic “is more accurately described as tax avoidance — maybe somewhat aggressive tax avoidance.”
The IRS evaluated a 2022 complaint about the Bidens’ filings for 2017 and 2018 and did not appear to take action.
A former Republican staffer on Capitol Hill, Chris Jacobs, filed a complaint in February 2022 with the IRS about the Bidens’ use of S corporations, the New York Post reported in May 2022. The IRS’s whistleblower office sent Jacobs a letter dated April 2022 that said the information he provided did not result in any collection of taxes or penalties.
The letter, which Jacobs forwarded to PolitiFact, was labeled “final determination” under the IRS code and “denial.”
The Biden and Obama administrations both proposed eliminating the use of S corporations, but neither administration succeeded.
White House spokesperson Andrew Bates told PolitiFact, “During the first routine audit of this administration, tax years 2017 and 2018 were discussed with the IRS, who examined the finances of the S-corporations going back to their inception in 2017. They challenged nothing.”
Scott, a former health care company chief executive, has his own history with Medicare. In 1997, federal agents said they were investigating whether Scott’s company, Columbia/HCA, had committed Medicare and Medicaid fraud. Scott resigned a few months later, and the company later settled and was fined $1.7 billion, a record at the time.
Scott said President Joe Biden “cheated on his taxes and got away with it.”
The Bidens’ 2017 and 2018 tax filings showed that they used S corporations to shield a portion of their income from as much as $500,000 in taxes. Some experts consider the tactic to be an “aggressive” way to legally avoid taxes.
However, experts agreed that this would not be characterized as cheating, much less illegal. There’s a long history of high-income taxpayers using it, including politicians from both parties.
When the IRS evaluated a complaint about the Bidens’ filing, the agency appears to have not taken any action on it.
We rate the statement False.
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