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Mitt Romney: The Anatomy of a Rich Man’s Tax Return

Lynn Jenkins, Esq.

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Romney opened his personal finances for public scrutiny by releasing his Form 1040 for the tax year 2010 and his estimated Form 1040 for the tax year 2011.

Under increasing political pressure from both Democrats and Republicans in this year of election politics, GOP presidential candidate and

front-runner Willard “Mitt” Romney recently released his 2010 and 2011 federal individual income tax returns and other income tax documents.

Romney opened his personal finances for public scrutiny by releasing his Form 1040 for the tax year 2010 and his estimated Form 1040 for the tax year 2011. He released as well the Forms 1041 for his and his wife’s blind trusts and for his family’s blind trust for the tax year 2010. Lastly, as part of this disclosure, he released Form 990-PF for 2010 for a family foundation.

Most taxpayers are familiar with Form 1040. It is the individual income tax return to be filed annually (usually by April 15) with the IRS. However, Form 1041 and Form 990-PF are much less familiar to the average taxpayer. Form 1041 is used to calculate the tax due on income generated by a trust or an estate which operates as a business. Form 990-PF is used to report to the IRS the revenue and the expenses of a private charitable foundation. Usually, these section 501(c)(3) foundations – such as “The Tyler Charitable Foundation” formed by Romney and his wife – are exempt from taxation because they are operated exclusively for non-profit purposes.

Focusing on Romney’s individual tax returns for both years, three facts are immediately evident: (1) Romney is a very rich man estimated to be worth between $85 million and $264 million; (2) Romney is scrupulous in observing the requirements of the tax code; and (3) Romney did not work one day in either 2010 or 2011. Despite the fact that he hawks himself as a middle-class American in touch with middle-America and middle-America values, he is not a wage-earner. His income is derived from interest, dividends, and (most importantly) capital gains.

Most middle-class Americans prepare their tax returns based on their W-2s which shows their earnings for the year. This amount is then transferred to Line 7 (for wages, salaries, tips) on the front page of their 1040. For his 2010 and 2011 individual tax returns, Romney’s Line 7 is blank. He had no wages, no salaries, and no tips. What he did have, however, is $12.5 million in short and long-term capital gains in 2010 and $10.7 million in short and long-term capital gains in 2011 plus $7 million in interest income and another $8 million in dividends for those two years.

In 2010, Romney’s income was $21.5 million. In 2011, his income was $20.9 million. Simple math proves that his income (not his earnings) totaled over $42 million for those years. Under the bald terms of the tax code, his tax rate is topped at the bracket of 35 percent. Thus, he should have paid 35 percent on $42 million or roughly $14 million in taxes. Instead, he paid less than half of that amount ($6.2 million). With a tax break of $8 million, small wonder he can offer a $10,000 bet to former GOP contender Rick Perry as easily as most Americans order a pizza.

As a very rich man, Romney is able to legally take advantage of those millionaire “loopholes and shelters” in the U.S. tax code so decried by President Barack H. Obama in his State of the Union address in January and so repeatedly criticized by another very rich man, Warren Buffet, in his statement: “Have I mentioned lately that my secretary’s paying a higher tax rate than I am?”

Romney acknowledged that his effective tax rate is about 15 percent, stating: “The last ten years my income comes overwhelmingly from investments made in the past rather than ordinary income or rather than earned annual income.” In contrast, 25 percent is the marginal tax rate on a couple earning $70,000. In further contrast, married wage earners with $70,000 in taxable income pay about $9,700 in taxes in 2011. Romney whose multi-mega income is 300 times more than $70,000 pays just three million dollars in taxes. The adoption of the Buffet Rule – also urged by President Obama in his State of the Union address – in which taxpayers making more than $1 million a year would pay no less than 30% in taxes would begin to address this tax inequality.

Romney avoids paying his fair share in federal taxes by a long-term capital gains rate favorably set for the wealthy at a top tax of only 15 percent. So, in 2010, instead of paying the highest tax rate of 35 percent on $12 million in capital gains (or $4.2 million), he paid only 15 percent on that same $12 million (or $1.8 million). And, in 2011, instead of paying 35 percent on $10 million in capital gains (or $3.5 million), he paid just 15 percent on that same $10 million (or $1.5 million). Legally, under this loophole in the tax code, he avoided $4.4 million in taxes.

For 2010 and 2011, Romney’s income was subject to the Alternative Minimum Tax (AMT). The AMT supposedly serves as an equalizing mechanism. It was inserted in the tax code to ensure that upper-income taxpayers pay their fair share in taxes. However, in 2010, Romney paid only $232,989 in alternative minimum tax; in 2011, he paid just $224,425. That’s less than $460,000 in additional tax on an income of $42 million. Considering these facts, it must be questioned whether the AMT effectively safeguards equality between the American taxpaying classes.

Lastly, like most taxpayers in the top income brackets, Romney benefits from itemizing his deductions and, specifically, by making contributions to charities. In 2010, his itemized deductions totaled $4.5 million with more than 66 percent of that attributable to charitable contributions. In 2011, his itemized deductions totaled $5.6 million with more than 71 percent of that attributable to charitable contributions. Under previous provisions of the tax code, itemized deductions (including charitable contributions) were capped for high income taxpayers. The Bush-era tax cuts eliminated such caps. Thus, by itemizing his deductions for these years, Romney was able to reduce his gross income and thereby his taxable income by $10 million.

In other words, he cut his taxes by making charitable gifts.

While modest gift-giving and the associated charitable deduction on Schedule A is the norm for the average taxpayer, few middle-class Americans possess the disposable personal income necessary to so exploit this tax advantage – as Romney clearly does. Given this irrefutable fact, it must now be subject to debate whether taxpayers in the highest tax brackets should be permitted such exploitation under the tax code. The very rich are free to make unlimited charitable contributions (and should do so as guided by their consciences), but why should they be able to leverage those contributions to reduce their taxes? And, isn’t such leverage – only available to top bracket taxpayers like Romney – nothing more than a crude tax shelter for the wealthy?

Indeed, Romney’s entire income tax disclosure including the blind trusts, the charitable foundation, and the individual tax returns with their multitude of disclosures and complex transactions, with a Swiss bank account, and with investments in the Cayman Island, are all aimed to reduce his tax liability and are an affirmation as well as a reflection of his unabashed and forthright statement: “I pay all the taxes that are legally required and not a dollar more.”

Lynn Jenkins, Esq. is a practicing attorney, a UNH graduate student, and is enrolled in the University’s Masters of Taxation program. She is designated as a registered tax return preparer (RTRP) by the Internal Revenue Service, and is a Master Tax Advisor at the H&R Block office in Orange. She would be happy to review your state and federal income tax returns for past and present years. She can be reached at (203) 799-2966. Call her to use this FREE SERVICE to students, faculty, and the UNH community.

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Mitt Romney: The Anatomy of a Rich Man’s Tax Return