The calls for more Romney tax returns may be based in a lot of motives: playing politics, distraction, a desire to force the Republican nominee to live up to his father’s ideals. Whatever the case may be, it certainly is not purely making an argument about the state of the tax structure, because enough can be gleaned from Gov. Romney’s returns with the ones available. With the Republican National Convention underway, a look at the former Massachusetts governor’s returns reveals some interesting tax-planning strategies.
Capital Gains: As part of the Bush-era tax cuts, qualified dividends and long-term capital gains have been taxed at a rate of 0-15%. However, if nothing happens by the end of the year, when the tax cuts expire as part of the fiscal cliff, the rates on long-term capital gains will be 10-20%. Depending on your income tax rate, and the appreciation in your stock (how much it’s worth over how much you paid), you may want to sell some highly appreciated stock before the end of the year in order to take advantage of lowered tax rates. You should talk to your tax advisor about your specific situation.
Charity: For high income individuals, charitable contributions can be a way to reduce income. However, nonprofit organizations and private foundations can be organized to transfer assets toward a charitable cause you support. The Romneys donated $2,983,974 to charity in 2010. Of that amount, over $1.5 million was donated to the Church of Latter-Day Saints (Mormon church). Another $1,458,807 in stock was given to the “Tyler Foundation,” which is the Romneys’ private foundation, not to be confused with the other Boston-based Tyler Foundation. Although setting up your own charity is not worthwhile for everyone, for those who make large charitable contributions and require substantial estate tax planning, it may be an effective strategy to remove assets from your estate, save on current income tax, and leave a legacy.
Gifting, Irrevocable Trusts, and Other Entities: When planning to avoid estate taxes in particular, or lower a family’s overall income tax obligation, gifting to your heirs during life can be effective to remove relatively small amounts from your estate. Each donor can gift $13,000 per year to each donee. This means a mother and father can give $52,000 to their daughter and her husband each year. No gift tax return is required for such gifts. Additionally, business entities and irrevocable trusts can receive assets over time, sometimes at discounted values, and allow you to retain a substantial amount of control. The Romney tax returns reveal a number of “flow-through” entities on their return, although it is impossible to know the purposes and other partners.
Although the Romneys use a combination of all the above strategies, you don’t need a $100 million estate to find a use for them. Additionally, each strategy has non-tax reasons for its use. Seeking the advice of a qualified estate planning attorney in consultation with your income tax advisor can help you create an effective plan, especially if you act before the end of this year. Or, if all else fails, run for President!
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