Introduction
Under political pressure, presidential candidate Mitt Romney reluctantly released his 2010 federal income tax return. His gross income was an eye-popping $21.6 million, although his tax bite was $3.1 million, or about 15% of his adjusted gross income.
Romney used a variety of controversial, but currently legitimate, tax breaks to lower his payroll and income taxes below the average percentage paid by workers earning $50,000 – $100,000.
2010 Income Tax Return
Romney’s tax return contains $21,646,000 of adjusted gross income, $4,500,000 of itemized deductions, mostly charitable deductions and state income taxes, taxable income of $17,127,000 and a tax of $3,106,000.
He earned $540,000 in speaker’s fees and another $114,000 in director’s fees from the Marriott corporation. His tax return runs 203 pages, including 67 pages of supplemental attachments.
Miscalculations
Romney’s tax returns are so complicated that he overpaid about $44,000 in taxes, because his accountants incorrectly calculated the gain on the sale of Goldman Sachs stock, according to the New York Times.
His accountants used a $9,800 basis in the calculation of a stock sale for $286,500 when the actual basis was closer to $316,000; in fact, there should have been a capital loss of about $20,000.
Carried Interest
Unlike doctors, lawyers, plumbers and teachers, all of whom pay taxes at ordinary income rates, those managing investment partnerships and hedge funds are taxed on their personal services at 15%, the long-term capital gain and corporate dividend rates.
This is because they claim that they are investors in the enterprise and receive a percentage of the partnership, rather than individuals performing personal services.
Romney’s ability to characterize his participation in the various Bain Capital investments as carried interest help lower his tax rate to 15% federal. Approximately 73% of his gross income was classified as carried interest.
Stock Donation
Romney donated appreciated stock to charity and received a charitable deduction at the full fair market value of the stock. The gain on the appreciation goes untaxed.
In contrast, if he were required to sell the stock and pay the tax, the charitable deduction would be reduced by the amount of tax paid.
In 2010, Romney donated $1.46 million in stock to his private foundation, the Tyler Foundation.
Operating a private foundation has a distinct advantage: contributions are deducted in full, but the funds can remain in the foundation for future distribution to charity. In contrast, those without private foundations must make full payment directly to a charity to claim a deduction.
Charitable Deduction
In a potentially embarrassing admission, Romney contributed to the Mormon church $1.525 million or about 7.2% of adjusted gross income, instead of the tithe of 10% that is required.
In contrast, on his 2011 tax return, he donated the full 10% of his adjusted gross income, which suggests that he shorted his church about $640,000 in 2010 and could be the real reason why he resisted releasing his return.
