Posts Tagged ‘return’

Having had the opportunity to review President Obama’s newly released 2011 tax return for Bloomberg news this morning, one thing is immediately obvious: the President’s tax return stands in stark contrast to the 2010 return previously released by his Republican counterpart, Mitt Romney. One look at the candidates’ tax filings makes it clear why tax policy will likely play an integral role in the upcoming election, as the dramatic differences evident in the determination of each man’s tax liability are mirrored in their respective tax proposals. 

Based purely on their respective tax filings, President Obama will be sure to portray himself as the “every man” in the upcoming election, despite being among the top 1% of earners in America. To the contrary, Mitt Romney, through no fault of his own, is likely to be painted as the embodiment of a broken tax system. This difference in perception will be due to a number of factors evidenced in their respective tax returns:

Sources of Income

The overwhelming majority of President Obama’s taxable income in 2011 was of the ordinary variety — wages of $395,000, self-employment income from book sales of $441,000, and taxable interest of $11,000. The President had no investment income in the form of qualified dividends or long term capital gains during 2011. In fact, Obama does not appear to be invested in the stock market to any material degree. As a result, the President derives no benefit from the 15% preferential tax rate afforded to these classes of income by the Bush tax cuts.  

To the contrary, on his 2010 tax return, Mitt Romney reported no wages and relatively minimal self-employment income. Instead, of his $21,600,000 of adjusted gross income, $5,000,000 was in the form of qualified dividends and $12,500,000 was generated as long-term capital gains. Courtesy of the Bush tax cuts, all of this income was taxed at the preferential 15% tax rate.

Level of Transparency

President Obama owns no rental properties, holds no interests in partnerships, S corporations, or trusts, and he fully maximizes his retirement plan contributions.  Even the President’s itemized deductions give the appearance of relative “normalcy;” he has a mortgage on his home and  his real estate taxes are a “reasonable” $22,000.

In contrast to the President, sophistication and complexity permeate Romney’s return. He holds interests in multiple trusts and rental properties, and his return is littered with informational filings related to numerous offshore investments. He owns no mortgage on his home, but paid over $226,000 in real estate taxes during 2010.

Effective Tax Rate

Due to his combination of considerable ordinary income, the absence of qualified dividends and long-term capital gain, and a moderate amount of itemized deductions, the President’s effective tax rate in 2011 was 20.5%. This is a number many American’s are likely to find more palatable than the 13.9% paid by Mitt Romney in 2010, particularly in light of the fact that President Obama’s adjusted gross income was $789,000, compared to the $21,600,000 Romney reported.  

Industry-Specific Tax Breaks

Perhaps most egregious in the eyes of observers, a substantial portion of Romney’s income is subject to one of the more hotly debated tax breaks currently available in the Code: the 15% tax rate afforded “carried interest.” This break allows private equity fund managers such as Romney to pay tax on the allocable share of fund income they receive in exchange for management services at a rate of 15% if the allocable income is in the form of long-term capital gains or qualified dividends, despite the fact that compensation for services rendered is typically taxed at ordinary rates.

 To the contrary, President Obama receives no industry-specific breaks.

Reflections in Tax Policy

Perhaps more so than in any election in recent memory, the tax returns filed by President Obama and Mitt Romney provide a window into their tax policies.

President Obama has built his platform on what he calls “fairness.” It is time, he insists, for the wealthy to pay their share. To do so, he proposes changes that would impact his tax situation minimally, but would drastically change that of his opposition and many of the nation’s wealthy.  

The President has vowed to repeal the Bush tax cuts, which would increase the top rate on ordinary income from 35% to 39.6%. While this would increase the tax imposed on Obama’s wages and self-employment income, it alone would do little to effect those of Romney’s ilk who earn their income predominately from qualified dividends and long-term capital gains.

To that end, the President has proposed returning the tax rate on qualified dividends to the top ordinary rate of 39.6%, while the tax on long-term capital gains would increase from 15% to 25% for those with adjusted gross income in excess of $250,000. These changes, if implemented, would have virtually no impact on the President’s tax liability, courtesy of his lack of investment income.

Romney, on the other hand, would feel a significant pinch, as the tax on his $5,000,000 of qualified dividends would increase by 24.6%, with the tax on his long-term capital gains of $12,000,000 jumping by 10%.

The President’s war on the perceived inequities doesn’t end there, however. He proposes two more law changes that would ensure Romney and other wealthy taxpayers pay there “fair share.” First, Obama would put an end to the tax break on carried interest, meaning much of Romney’s long-term capital gains would be taxed as ordinary income, at a maximum rate of 39.6%. In addition, the President proposes to institute the much-discussed “Buffett Rule” — named after the billionaire business magnate who stirred the hornet’s nest by famously claiming that he paid a lower tax rate than his secretary — which would guarantee that taxpayers earning over $1,000,000 in AGI paid a minimum effective tax rate of 30%.

Given that President Obama’s adjusted gross income did not exceed $1,000,000 in 2011, the Buffett Rule would not affect his tax liability. For Mitt Romney, on the other hand, the Buffett Rule would more than double his effective tax rate and his resulting tax liability.

It is this difference in their current and potential tax liabilities that the President will play up in his ensuing campaign. In order to chip away at the deficit, the President will insist, the nation’s wealthy must no longer be able to take advantage of industry-specific tax breaks and preferential tax rates and start pulling their weight, in the name of both fiscal responsibility and social equitability.

In direct contrast, Mitt Romney has built his tax platform on an array of tax cuts that could easily be dismissed as self-serving, but in fact may well do more to stimulate the economy and reduce the deficit than the increases proposed by the President.

Romney proposes to cut the tax rates for all Americans, with the maximum tax rate on ordinary income dropping to 28%. This would result in a 7% reduction on the President’s wages, but would have little effect on Romney’s return, with its absence of wages and self-employment income.

Where Romney would benefit greatly, however, is his proposal to keep the tax rate on long-term capital gain and qualified dividends at 15%. While this would preserve the preferential tax rate applied to the overwhelming majority of his income, Romney does not hoard the benefits all for the super wealthy. Instead, he proposes that taxpayers earning less than $250,000 in AGI be able to earn interest, dividends, and long-term capital gains tax free, a law change that would certainly motivate the middle class to save and invest.

Romney would keep the current preference on “carried interest” in place and also attempt to repeal the estate tax, two policies that are likely to be perceived as his catering to the super wealthy. As the majority of Americans will never have to concern themselves with carried interest or be subject to the estate tax, they may well see this as Romney aiming to protect his fortune and those of his Republican constituents, further alienating him in the eyes of many.

It’s rare that the tax world takes over the front pages, but judging by the immediate and widespread reactions to the President’s release of his tax return this morning, it appears the tax policies of Obama and Romney have become the focal point of the upcoming election.

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Faced with hefty student loans and the harsh realization that unemployment isn’t just for philosophy majors anymore, 85% of recent college graduates are returning home to shack up with mom and dad.

As a parent, you’re left with the unenviable task of trying to balance society’s expectation that you won’t change your locks with your desire to teach your children to fend for themselves and become responsible adults.

To that end, might I recommend you start helping your kid spread his wings by making him or her file their own tax return. The Wall Street Journal has published a helpful article detailing the finer points of filing your first return that is essentially idiot proof, which is a good thing since Junior matriculated at Bellevue University.

From the article:

You’ll need documentation of your income and anything that qualifies for a deduction, which reduces your taxable income, or a credit, which reduces your tax burden. These documents, typically sent via mail, are often missed by young filers used to doing everything electronically, says Elaine Smith, a master tax adviser at H&R Block

As an aside, I am absolutely changing the title on my business cards to read “Master Tax Adviser.” This has got to be the most self-aggrandizing designation since the one made popular by Wile E. Coyote:

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