Romney Releases 2010 Tax Return

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Mitt Romney released his massive 203 page 2010 tax return yesterday.  The big story is the 14% tax rate that he pays.  But, to me, as a tax professional, my eyes went to Schedule A, Line 22, Tax Preparation Fees.  I’m always curious what high profile individuals pay for tax preparation services.  And, guess what?  The line is blank.  Is this a mistake?  Did Pricewaterhousecoopers LLP do it for free?  He was way over the 2% threshold so the tax preparation fees would have been a dollar for dollar deduction.  Oh, well,  I guess I’ll focus on the 14% issue.

Here are the facts:

1) His income was about $21.6 million

2) The majority of his income was from Capital Gains ($12.5 million)

3) The next largest portion was from Dividends ($4.9 million)

4) The third largest portion was from Interest ($3.3 million)

Capital gains are taxed at 15%.  There is a reason for that.  It encourages investment.  Raise the capital gain rates and you discourage investment.

Dividends are also taxed at 15%.  The reason for this is because they have already been taxed at the Corporate Income Tax rate of 35%.  Corporations don’t get a deduction for dividends.

Interest is taxed as ordinary income which means Mitt Romney paid 35% on his Interest Income.  This is because Corporations DO get a deduction for interest payments and therefore don’t have to pay taxes on it.

5) He gave $3 million to charity.  This helped reduce his taxable income and, of course, his overall tax rate.

6) He earned $593K from speaking fees, director fees, etc.  He reported this on Schedule C and paid the FULL Medicare Tax on it.  He could have run it through an S-Corporation, paid himself a reasonable salary, and then taken the rest of it as a distribution, like Newt Gingrich did, but he didn’t .   Not that there is anything wrong with the way Newt did it.  I’m just pointing out the facts.  Romney should at least get some points for that.

There is a lot to this tax return and I’m not going to spend the time going through all the forms.  I’ll just stick with the basics.  But, I don’t see anything big here.  The only ammunition will be for those who want to play class warfare.

Steps To Starting A New Business

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Starting a new business is exciting, however, there are a lot of administrative items to take care of.  Here is a general guide on what to do.

Decrease Your Chances of Being Audited

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According to IRS statistics your chances of being audited as a Schedule C Sole-Proprietorship are 3-4%, compared to an S-Corporation of 0.3-0.4%.  So, your chances of being audited are about 10 times greater as a sole-proprietor.  That sounds like a great reason to set your business up as an S-Corp!

Other ways to reduce your chances of being audited are: