Janathan L. Allen, Esq., tax attorney and partner at Allen Barron, Inc. and Janathan L. Allen, APC, was recently on KFMB AM 760 on the “It’s Your Money, Not Theirs” radio show with host Joe Vecchio and Richard Muscio, CPA. Ms. Allen and Mr. Muscio reviewed Mitt Romney’s 2010 tax returns (203 pages!) and discussed why he did not pay that much income tax as a function of his total income. The show aired on 2/5/2012 at 7:00 PM. To listen to this interesting and informative show, please click here.
In 2010, Mr. Romney had an adjusted gross income of $21,646,507, interest income of $3,295,727 and income from dividends of $4,923,348. About 70% or $3.4 million are qualified dividends taxed at 15% rate. His biggest income element was $12, 573,000+ which was primarily long-term capital gains. About 75% of his income was subject to 15% tax rate per Income Tax Code. Criticism in the press has been that Mr. Romney has over $20 million in income but pays less than $3 million of income tax every year. 13.9% of his adjusted gross income was amount of income tax paid. As President Obama mentioned in his recent State of the Union address, Warren Buffett’s secretary pays more income tax than Mr. Buffett does. Is that fair? It really comes down to perception of what type of income being taxed. Most of Mr. Romney’s income is coming from taxable interest or dividends. Essentially that’s income that’s been taxed twice. Dividends were taxed once at corporate level, then distributed out to shareholders who then pay tax on it again. The interest income is the interest is earned on whatever particular investments he has. It’s consistent with the income tax code, which says what the rate on this type of income is going to be taxed at.
The reason Mitt Romney did not pay that much income tax as a function of his total income were due to the income tax provisions that were only extended for 2 years at the end of 2010, which are due to expire on December 31st, 2012. This includes a 15% maximum tax rate on long-term capital gains and the 15% qualified dividends rate . The income tax provisions affect anybody with long-term capital gains and qualified dividends. Many smaller income earners have both those things, but in smaller amounts than Mr. Romney’s income tax returns.
Also, the other thing that may yet change dramatically is the estate and gift tax exemption, which has grown to $5 million dollars. So this year in 2012, you can give away or die with $5 million dollars and pay no estate tax or gift tax; however, if that provision is allowed to sunset, that exemption amount will only be $1 million dollars and further, the gift tax and estate tax rate will go from 35% to 55%. So there is huge uncertainty in the income tax as well as the estate and gift tax code right now. Certainly, the estate and gift tax exemption only applies to very wealthy people; however, bear in mind that if that gets reduced to $1 million dollars, for husband and wife, that is only $2 million dollars of assets.
Please take a moment to listen to the show and send us your thoughts. You can reach us through the contact box on our web page at www.allenbarron.com or you can call us at 866-631-3470 for assistance with your tax returns.