On Monday, President Obama suggested a tax break that will benefit America's wealthiest citizens -- as well as some of its poorest. He proposed that the Bush-era tax cuts, which are set to expire on January 1, 2013, be extended for a year for the first $250,000 of taxable income. As for the Bush-era cuts affecting taxable income over $250,000, he suggested that they be allowed to expire.
This isn't the first time that Obama has proposed this compromise; he has already proffered this suggestion twice in his presidency, and it has already been rejected twice. In both cases, opponents described Obama's proposal as "class warfare," and suggested that he was pitting the poor against the rich. And, as media outlets across the country have reported on Obama's most recent resurrection of the policy, the same old attacks have reared their head.
The odd thing is, as "class warfare" goes, Obama's proposal would actually give the wealthiest Americans a pretty solid tax break. Under the plan, a single filer making $250,000 a year or more would keep the $6,021.36 break that they got from President Bush's 2001 and 2003 tax cuts. On any taxable income over $250,000, Bush's breaks would expire and taxes would go up.
If Obama's proposal will benefit all taxpayers, why are reporters suggesting that it is only giving a cut to the middle class? In New York magazine, Dan Amira suggests that the problem lies with Obama. Facing a wealthy opponent, the president -- Amira argues -- is playing up the benefits for the middle class in an attempt to force Mitt Romney into a corner where he has to defend tax cuts for the rich.
Thanks Mitt and Newt: A Dozen Tax Tips for the Rest of Us
Obama's Tax Cut for the 1% (and Everyone Else, Too)
If you think Romney and Gingrich disagree about undocumented immigrants, their tax returns suggest that they're polar opposites when it comes to investing in municipal bonds to earn tax-free interest.
The former speaker's 2010 return shows he earned $10,754 of tax-free interest, compared to $26,655 of the taxable variety. Romney's forms show just $557 of tax-free interest and $3,295,727 of taxable interest income.
Remember, to figure the taxable-equivalent yield of a tax-free bond, divide the tax-free yield by 1 minus your marginal tax rate. Since Gingrich's marginal rate is 35%, a 3.5% tax-free yield is worth the same as a 5.38% taxable yield (3.5/0.65). Romney was hit by the alternative minimum tax in 2010, so his marginal rate was 28%. Avoiding a 28% tax makes a 3.5% tax-free rate equal to a 4.86% taxable yield (3.5/0.72).
When you buy your principal residence, points you pay to get your mortgage are fully deductible on your tax return for the year you close. When it comes to a second home (or a rental property or a refinancing), however, that cost must be amortized over the life of the loan -- 1/30th a year if you have a 30-year mortgage, for example. That can lead to relatively small -- and relatively easy-to-forget -- write offs.
But if you follow Gingrich's example, you won't miss this tax break. His return shows a $19 deduction for a portion of the $2,261 it cost him to refinance the mortgage on a rental property he owns in Whitehall, Wisc. Since the refi was in October, 2010, he got to write off one-fourth of 1/30th of the cost on that year's return.
Anyone planning a substantial charitable gift this year should take a page from Romney's playbook and consider donating appreciated securities rather than cash.
As long as you have owned the asset for more than a year, you get to deduct the full fair market value of the gift, not what you paid for it. (And neither you nor the charity ever has to pay tax on the appreciation that accrued while you owned the stock.)
Romney's 2010 return shows that he and his wife, Ann, donated $1,525,167 in cash and another $1,458,807 in non-cash gifts -- much of it appreciated stock in Domino's Pizza.
Even if you don't itemize deductions, you can write off alimony paid to an ex-spouse ... as long as you also include the ex's Social Security number so the IRScan make sure he or she reports the amount as taxable income. Gingrich fulfilled that requirement and deducted the $19,800 he paid his ex-wife in 2010.
Tax law allows you to deduct the loss on a stock that becomes worthless, treating it as though you sold it for $0 at the end of the year in which it lost all value. That appears to have happened to at least one of Mitt Romney's investments. His return shows a $63,511 loss on shares in an investment fund that were disposed of for $0.
The stock market meltdown of 2007-2009 was not kind to Mitt Romney. He suffered losses so serious that, even after wiping out all of his capital gains, he carried $4,844,089 of long-term losses over to his 2010 tax return.
Remember, losses are used to offset gains dollar for dollar, but then only $3,000 of excess loss can be deducted against other kinds of income such as salary or interest income. Any excess is carried over to the next year. On his 2010 return, Romney used nearly $5 million of such losses to offset gains that would have otherwise been taxed at 15%, saving him $726,613.
If you had carryover losses on your 2010 return (as the Gingriches did), be sure to revive them when you complete your Schedule D this spring.
Congress has created special rules for what it calls "passive activities," a group that includes most investments in real estate and limited-partnerships.
Basically, losses from such investments can only be deducted against gains from similar activities. There's an exception that allows up to $25,000 of loss from rental real estate to be deducted if you are "actively" involved in the rental.
We don't know if Gingrich is actively involved in the rental in Wisconsin, but even if he was, he would not have been permitted to deduct the $4,646 loss he reported. The $25,000 allowance gradually disappears as adjusted gross income moves between $100,000 and $150,000. With AGIof $3,142,066, Gingrich is out of luck. (He can stockpile the disallowed loss and deduct it when he sells the property.) By the way, the Romneys return shows that the passive loss rule blocked the deduction of over $2 million in losses from limited partnerships.
Plenty of politicians have gotten in trouble in the past for failing to pay Social Security taxes for their child-care providers and household help. For 2012, if you pay household help more than $1,800, you are required to file a Schedule H with your return and pay Social Security and Medicare taxes for your employee.
Both Romney and Gingrich included the form and paid the piper for their household help in 2010. Ann Romney reported that she paid four household employees a total of $20,603 in 2010 and paid $3,152 in taxes for them. Gingrich reported that he paid household help $14,774 and paid $2,260 in Social Security and Medicare tax.
The federal income tax is on a pay-as-you-earn system. If you don't pay in enough during the year -- via withholding from paychecks or estimated tax payments -- the IRSwill slap on an underpayment penalty. Generally, you avoid the penalty if your payments during the year are at least 90% of what you owe. Gingrich owed an extra $382,734 when he filed his $2010 return, 38% of his tax bill for the year. That triggered an underpayment penalty of $1,543.
The opposite side of the coin from the underpayment penalty is paying in too much doing the year. About 75% of all taxpayers are in this boat, and get tax refunds every spring. We think that's silly, and have a calculator to help you match withholding from your paychecks to what you'll owe for the year. Our calculator won't help Romney, though, since he has no wages from which to withhold. He overpays via quarterly estimated tax payments, and boy does he overpay! His 2010 return shows that he paid in $1,609,441 more than the $3,009,766 that he owed. He didn't ask for a refund, though. He let the IRSkeep the cash as a down payment on his 2011 tax bill.
For 2010, the 6.2% employee share of the Social Security tax applied to the first $106,800 of wages. (The wage base is $110,100 for 2012; the rate is 4.2% for January and February and will jump back to 6.2% if Congress fails to extend the payroll tax holiday.) If you work more than one job and your combined salary exceeds the wage base, too much tax will be withheld from your pay. That happened to one of the Gingriches in 2010, so they claimed a credit of $367 to reclaim the excess tax withheld.
A special rule allows qualifying self-employed workers to deduct 100% of their medical insurance premiums, even if they don't itemize deductions. That might have helped Romney, who reported that he paid $14,176 in self-employed health insurance premiums in 2010. But he didn't get the tax break. Rather than claim the special deduction, Romney reported the premiums as medical expense on Schedule A, where a deduction is allowed only to the extent such expenses exceed 7.5% of adjusted gross income. Romney's $14,176 of premiums fell well short of $1,623,488 (7.5% of his AGI).
Amira's theory is good, but there's another possibility. When discussing the tax code, most analysts and pundits -- not to mention average citizens -- focus on the highest rate that an individual pays. One rarely hears about the fact that everybody pays only 10% tax on their first $8,700, 15% on everything between $8,701 and $35,350, and so forth. In other words, a millionaire pays the exact same amount in taxes on that piece of their income as someone who makes $35,350 per year...or $85,000, or $150,000. (Before deductions, of course.)
It's not hard to see why tax issues are drawn along wealth lines -- after all, creating barriers between the rich and the middle class makes for good headlines and hot political battles. In truth, though, the line isn't between cutting taxes for the rich and cutting them for the middle class; it's between cutting taxes for the rich, and cutting taxes for the rich more.