GOP presidential candidate Mitt Romney paid a 14% effective income tax rate in 2010 after making $3 million in tax-deductible charitable donations and drawing most of his income from investments. Brody Mullins discusses on Campaign Journal.
How did they do it?
That is the question many Americans are asking of Mitt and Ann Romney’s 2010 tax bill, disclosed on Monday evening. While the couple paid almost $3 million in taxes, that amounted to less than 14% of their $21.6 million income.
The Romneys’ rate was far lower than the average of 24% paid by the top 1% of U.S. earners, according to the nonpartisan Tax Policy Center.
The couple’s 2010 filing presents a rare glimpse into how the ultrawealthy can use the tax code to their benefit, and offers important lessons for others.
The biggest: the powerful tax benefits of capital gains, which are taxed at a top rate of just 15% if the underlying investment is held for more than a year.
“There’s a saying in Texas: If you don’t have an oil well, get one,” says Janet Hagy , a certified public accountant practicing in Austin, Texas. “I tell my clients, ‘If you don’t have capital gains, get some.’”
Another lesson: Get good tax help. The Romneys’ 1040 return is 203 pages long, with different “schedules” and 20 different forms attached, some of them multiple times—not the sort of work typically done by a neighborhood Joe.
Says David Kautter of the Kogod Tax Center at American University in Washington: “The only schedules missing [from the Romneys' return] are the ones for fishermen, farmers and the elderly. Maybe Mitt should get some cows so he can have a ‘full house’ of schedules.”
Some have suggested that, despite their low tax rate, the Romneys might have paid a few thousand extra dollars in tax. Among other things, they take no mortgage-interest deduction—a write-off claimed by 80% of taxpayers who itemize—or deductions for a home office, a car or travel expenses.
[Mitt Romney’s tax returns] lift the veil on how the wealthy can use the tax code to their advantage. Here are some lessons the experts have gleaned:
- Avoid salary, wages and tips to the extent possible
- Muni-bond interest isn’t the be-all and end-all
- Strive for “qualified” dividends
- If you have a “Schedule C” business, think twice before claiming a home-office deduction
- Generate income from long-term capital gains
- Know the score on itemized deductions
- Capital gains and dividends can help trigger the AMT
- Beware of small benefits requiring large tax-prep efforts
- Offshore investments can save onshore taxes