Mitt And Newt – What Can We Learn For Our Clients?

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The big news is that Mitt Romney released his tax returns today. Whoopee!

Aside from the political nonsense and in-fighting, we have an opportunity to look at the tax returns of two men in the top 1% earning bracket.
 
Let’s see what can learn about them – and things that can help our clients.
 
 
First of all, Romney uses Price, Waterhouse, Coopers to prepare his taxes. So, we can only imagine his fees. Gingrich works with a small CPA firm in Maryland that’s been around a long time – like one of us.
 
Second, a lot of the Romney’s assets are in blind trusts, so they are not actively managing their funds.
 
OK, let’s compare.
 
Nearly half of Romney’s income is from capital gains or qualified dividends. Limited to 15% tax rate. That’s smart. Especially since he showed over $12 million in capital gains income and no carryforward losses. (Who’s managing his money!)
 
Gingrich show that 0.19% of his income is qualified dividends and 0.34% is in tax-exempt interest. So most of his income is taxable – and he has about $30,000 worth of capital loss carryovers. (hmmm…sounds like some of my clients.)
 
Romney has a substantial foreign tax credit - over 4% of his taxes
Gingrich has none.
 
Another interesting note: Romney pays his taxes and estimated tax payments on time, or with his extensions. He has not underpayment penalties.
Even though Gingrich is paying withholding and rolled over his prior year refund, he underpaid nearly half his tax liability. He incurred a penalty of over $1,500. This basically says either he’s not managing his funds properly and forecasting his taxable income. Or his CPA firm doesn’t know how to use the annualized penalty computation on page 4 of the Form 2210.
 
Gingrich pays a little alimony. Not much, as a percentage of his income - less than 1%.
 
Romney is far more generous, contributing 13.8% of his income to charity, to Gingrich's 2.6% contribution.
Note: nearly $1.5 mill of Romney's contributions are non-cash??? (I have to look at that!) 
 
Aaah…very smart. Look at Form 8283 (page 127) – all the non-cash contributions are shares of stock. No doubt, appreciated stock. Good strategy. That’s definitely something we are all recommending to clients.
 
Remind your clients to watch legislation as the year gets closer to an end. If we don’t get the capital gains rates extended, they may want to sell off appreciated stocks. Of course, since there will also be a huge stock sell-off at the time (for those doing this late in the year), prices will drop. You could advise your clients to keep cash on hand to buy the stocks as prices drop.
 
But…look at the charity to which he contributed the stock – the Tyler Foundation, a charity he controls. Also a good strategy (though I don’t know what it does).
 
This is a suggestion I have made to clients in the past. If you have too much profit and don’t want to pay tax, consider starting your own charity to allow you to do something beneficial or fun that you’ve always wanted to do – and fund it yourself. Handled properly, the deduction is legitimate – and you build up something that will hold your interest and energy when you retire.
 
One thing I find odd, on Romney’s Schedule B, he has the box checked showing offshore accounts in Switzerland. But it doesn’t mention the Cayman Islands holdings, or Switzerland and others. No doubt, this FBAR form included everything.
 
Other tax planning considerations. There is an observation that Gingrich avoided Medicare taxes on his business earnings by using an S Corp and underpaying wages to himself.
 
What do you think? Is $420,000 so unreasonable as a wage? Isn’t that the point of an S Corp, to allow the owner to do exactly that? What would you have shown as wages on $2.4 million in S Corp profits?
 
As to pass-through losses from K-1s, it’s not entirely clear to me why Romney is able to use passive losses of nearly $280,000 on Schedule E (page 19). Do you have any guesses? (Ah…we’d have to look further to the 8582 Forms.)
 
Interesting, the Other Income on line 21 ($279K loss) is an interesting way to treat a reduction in state tax refunds. There’s also a little income from cancellation of debt passed through from a K-1. OK….
 
 
Just some random thoughts, from a superficial look at these two returns. Once you look at the two tax returns let us know what observations you have.
 

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