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Posts Tagged ‘Tax Returns’

As April 15th nears, the pace, anxiety, and general chaos that overtake the typical accounting office is rivaled only by that of the local emergency room. Of course, we’re preparing Schedule Cs rather than saving lives, but hey, the tax industry is defined by nothing if not its sense of self-importance.

Amidst all of that chaos, it is easy for things to get lost in the shuffle. And that’s a damn shame, because while a preparer can put in a heroic effort to get a particular tax return done on time, those long hours and late nights do little to no good if you the preparer doesn’t actually, you know…remember to file the return.

It happens more than you can imagine; weeks or months of hard work undone by the seemingly simple process of dropping an envelope off at the post office. Of course, electronic filing has reduced the role of traditional mail in the filing process, but then as every tax preparer has learned, e-filing presents its own batch of potential landmines.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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Last night, Republican Rick Santorum, who shocked political pundits by toppling Mitt Romney and Newt Gingrich during his recent run of victories in Minnesota, Colorado and Missouri, finally relented to what has become a rite of passage for any serious presidential candidate: the public release of  his tax returns.

After Santorum published his 2007, 2008, 2009 and 2010 federal returns online (though some attachments were missing), we were asked to review the returns for Bloomberg. The verdict? They were remarkable in just how unremarkable they were.

Santorum’s returns stood in stark contrast to the much-publicized returns of leading Republican candidate Mitt Romney, both in terms of magnitude and composition:

-Whereas Romney’s AGI exceeded $20,000,000 in 2010, Santorum’s hovered around $900,00 for the four-year period.

-As opposed to Romney — whose income was largely taxed at the 15% rate on long-term capital gains and qualified dividends — Santorum generated almost no income subject to preferential rates (zero long-term capital gains and negligible (less than $700) qualified dividend income over the four-year period.)

-Instead, the bulk of Santorum’s income was realized in the form of wages (approximately $300,000 per year) and self-employment income (approximately $600,000 per year), which are subject to tax at ordinary rates. As a result, Santorum’s effective tax rate averaged close to 27% over the four-year period, which is nearly double Romney’s 2010 rate of 13.9%.[i]

-Also in contrast to Mitt Romney, Santorum’s returns contained no reference to family trusts or foreign investments. That’s neither good nor bad, just a fact, and one that is likely to make Santorum more identifiable to many taxpayers.

Also worthy of note:

-Santorum has seven kids, which may explain why he’s pushing to triple the personal exemption amount.

-Santorum paid AMT in 2006, but narrowly avoided it from 2007 through 2010. This was a bit of a surprise, as his large deductions for state taxes and personal exemptions (both AMT adjustments) made Santorum a prime candidate to be subject to the minimum tax. Because Santorum’s income steadily climbed into the higher tax brackets, however, his effective rate exceeded the 28% maximum AMT rate. Perhaps these close calls were the impetus for Santorum’s promise to do away with the AMT should he be elected?

-Despite being one of only four men left in the conversation to be the next leader of the free world, Santorum prepared his own tax returns. The thought of a man with AGI approaching $1,000,000 and such lofty political aspirations cranking out his own Schedule C on Turbo Tax is both adorable and dangerous, like a kitten playing with a handgun.

-Perhaps because the returns were self-prepared, Santorum deducted $85,000 in mortgage interest in 2009, an amount that borders on impossible given the $1,100,000 maximum amount of primary residence debt permitted to be taken into account under I.R.C. § 163. Either Santorum got a raw deal in the form of a 7.5% jumbo interest rate on his home, or he really needs to read this post.

-With AGI of nearly $1,000,000 per year but no investment income, Santorum’s tax returns beg the question: Where does he keep his money? Based on a quick perusal of his financial disclosure, it appears Santorum has $50,000-$100,000 in a checking account, $100,000-$250,000 of Universal Health Systems stock, $500,000-$650,000 in various IRA investments, and $250,000 in Section 529 plans so his seven kids can go to college and form a kick-ass volleyball squad.

How Santorum’s returns are received by the media and taxpaying public will begin to be revealed tomorrow, but this much is certain, no one will be able to attack his effective tax rate or use of loopholes favoring the wealthy.


[i] As I’ve stressed before, any discussion of Romney’s effective tax rate really should take into consideration the corporate level tax paid by his many investments.

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Ed note: If you received an email earlier today, please disregard. I had a case of premature publication. It’s embarassing, but it happens, and I’m not ashamed to admit it.

In response to increased scrutiny regarding the effective tax rate paid on his substantial income, Republican Presidential candidate Mitt Romney released his tax returns late last night. Yours truly was given an opportunity to review the returns immediately upon their release for Bloomberg and provide comment. You can read that article here, but in the interest of keeping this blog self-contained, the most revealing items included in Romney’s 2010 individual tax return are discussed below:

  •  His real name is Willard? I’d go with Mitt, too.
  • Romney paid $3,000,000 of federal tax on $21,600,000 of gross income, for an effective rate of 13.9%. While this is sure to draw ire from the 99-percenters, it is 100% legal, and is largely attributable to two things:
  1. Romney’s $18,000,000 of alternative minimum taxable income (he paid a small amount of AMT)  consisted of $15,500,000 of income eligible for the preferential tax rate of 15%. In specific, $3.3M of Romney’s $4.7M of dividend income was eligible to be taxed at this lower rate, a break that was added to the Code with the Bush tax cuts. In the absence of the Bush legislation, Romney’s entire $4.7M of dividends would have been taxed at the maximum ordinary income rate, currently 35%. In addition, Romney’s also recognized $12.2M of long-term capital gains, which similarly benefitted from the Bush cuts. The gains are currently taxed at 15% rather than the 25 or 28 percent rates that existed previously.
  2. As expected, Romney benefits greatly from the current treatment of “carried interest” as provided for under administrative rulings issued by the IRS. In short, a carried interest is a partnership interest granted to a partner — typically a money manager in a private equity firm — in only the future profits of the partnership in exchange for managing the money of the private equity firm, choosing its investments, divestitures, etc… Under Rev. Procs. 93-27 and 2001-43, the granting of a pure profits interest is not a taxable event; thus, when Romney receives a profits interest in a private equity firm, it is not taxed as compensation (or capital gain), and the future income of the private equity partnership that is allocated to him — typically long-term capital gains — is eligible for the preferential 15% rates.

The reason carried interests have come under attack — particularly from the Obama administration — is obvious. On the surface, the amounts allocated to the managing partner certainly appear to be compensation for services; thus, according to critics, they should be taxed at ordinary income rates rather than capital gain. While this law may change in the future, it is important to note that Romney is completely correct in treating the amount of income allocated to him from his carried interests — $7,000,000 of the total $12,200,000 of capital gain according to his campaign — as LTCG rather than compensation.

  • Of Romney’s $3,000,000 of charitable contributions, half were made in cash to the Church of Latter Day Saints (which would appear to be part of Romney’s tithing requirement), and half made in stock to Romney’s private foundation, the Tyler Foundation.
  • How bad were things in 2009 if even Mitt Romney had a $4,000,000 capital loss carryforward to 2010?

All in all, there as nothing shocking about Romney’s tax returns. Yes he paid only 13.7% of his income to the IRS in federal tax, but such is life under the current tax regime when the overwhelming majority of your income is earned in the form of long-term capital gains and qualified dividends. Critics, however, are sure to focus on four things:

  1. The effective rate. Again, for right or wrong, Romney paid only 13.7% of his income in tax, but he did so legally and in total compliance with the current rules.
  2. The pure size of the numbers. Even for a Presidential candidate, $20M of AGI is a lof to income, which may not be particularly well received in this time of the Occupy Wall Street movement, cries of economic inequality, and other opening salvos of class warfare.
  3. Romney received a $1.6M tax refund in 2010. Now you and I know that tax refunds are purely a function of your tax liability compared to the estimated payments you’ve made, but the public is likely to find it hard to swallow that someone with $20M of income received a refund exponentially larger than most people’s income for the year. Again, it’s not the right reaction, but it’s likely to occur.
  4. Prior to the release of his returns, Romney admitted to a 15% effective rate, stating that he did generate some ordinary income from speaking fees, but “not much.” It turns out “not much” was in excess of $500,000, a sum most would be more than happy to accept for a few hours of speaking. This could position Romney as “out of touch” with the average American, an angle many of his critics and opponents may embrace.

Additional coverage:

The Washington Post

The NY Times

CBS News

Wall Street Journal

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