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The Tax Prophet Newsletter   Issue #105 February, 2012


In This Issue:
2010 Income Tax Return
Carried Interest
Stock Donation
Charitable Deduction

Mitt Romney's Tax World

Part 1 of 3


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.

Because tax returns are confidential, Romney's release provides a glimpse as to how Wall St. tycoons (including Warren Buffet) game the system and wind up with a fraction of the tax rate imposed on the middle-class.

This is the first of a three-part series that explores Mitt Romney's tax world, including his income and estate tax planning, as well as the corporate tax shelters he sanctioned as a director of Marriott International, Inc.

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.


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

Romney greatly benefitted from the "carried interest" characterization of his investments with his former investment firm, Bain Capital.

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.

End of part 1

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All contents copyright 2012 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet is a registered trademark of Robert L. Sommers.