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.

IRS Direct Deposit Refunds Will Be Getting Faster

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The IRS is working toward a real-time filing system.  They announced today that they are hosting a Second Real-Time Tax System Meeting.  This real-time system will allow instant matching on returns which should result in 24 hour refunds.

In my opinion this is long overdue, at least the refund part.  Under the current system you can receive your refund in 5-10 business days.  This is without any type of document matching.  Employers don’t have to file W-3′s  and W-2′s with the IRS and SSA until Feb. 28th so any matching that is done is way after-the-fact.  In fact, the IRS admits that “It is not uncommon for a taxpayer to receive a notice 12 to 18 months after a tax return is filed.  This after-the-fact compliance approach can create problems and frustrations for both taxpayers and the IRS.”  So, my question to the IRS now is, what happens in the 5-10 business days that people currently have to wait?  Why is there even a wait time at all if there is currently no matching done?

When I e-file a client’s return I get an almost immediate response from the IRS that the return has been accepted.  In a matter of minutes their computers have matched up the taxpayer’s name, SS#, spouses name, SS#, all W-2 company names with Tax ID#’s and some other various information.  Of course, they cannot match up any W-2 payroll information because they either haven’t received the information from the employer or they have and it hasn’t been processed (it will be 12-18 months later).  Then, they wait 5-10 business days before they directly deposit the money?  Why?  What happens in that 5-10 days?  It appears, nothing.  There should already be 24 hour refunds.  They don’t need a perfect matching system in order to implement that.

This real-time system should be done in two phases:

1) Start refunding taxpayers money immediately upon them filing.  This would be simple to implement under the current system.  Anything larger than $15,000 should require additional approval (or matching) to prevent extremely large fraudulent refunds.

2) Start improving the matching system.

A real-time system is great, but, the big question for me is, how much “matching” is going to be done up front?  All of it?  And, will it cause even greater delays for many taxpayers in getting their refunds?  Employers aren’t perfect either.  Many times the information that they file with the IRS is inaccurate.  Under the current system taxpayers receive letters 12-18 months later.  Then they have to either agree with the changes to the return or disagree and state the reasons why they disagree.  Sometimes it turns out the the employers filed inaccurate information.

I’m for a real-time system.  But, in what form?  I think it would be great if the IRS would match things up faster so that taxpayers aren’t accruing interest and penalties for 12-18 months before they find out that their return is wrong.  But, the IRS already receives the info by Feb. 28th, 30 days after the taxpayer’s receive their tax documents.  Why does it take so long to match things up?  If they can’t match things up within a few weeks after receiving the info how are they going to operate a “real-time” system?

Can You File Your Tax Return Using Your Last Pay Stub?

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One question tax preparers frequently get asked is “Can I file my return using my last pay stub?”

There are really two questions here:  1) Can an individual file their own return using a pay stub instead of a w-2?  And, 2) Can a paid tax preparer prepare and file a return based on a pay stub instead of a W-2?

First, let me deal with the issue of paid preparers.  The IRS states that it is “against e-file rules” for preparers to file with a pay stub instead of a W-2.  This is on their web-site here.  When they say “against e-file rules” I’m not sure exactly what rules they are talking about or if they are specifically referring to paid preparers or individuals filing their own return.  I’ve read through the entire Handbook for Authorized e-file Providers and the only mention of preparing returns from a pay stub is on page 48 where it talks about advertising.   But, on page 30 it states that paid preparers must retain “Copies of Form W-2, W-2G and 1099-R”.  How can you retain a copy of it if you never saw the W-2 in the first place?  Do you really think that the client is going to bring back the W-2 later just so that you can keep a copy?  I don’t think so.  Paid preparers need the W-2 up front in order to protect themselves.  In addition, one of the questions that must be answered in all professional tax software when e-filing is “Check if this is hand written, altered or appears not to be a true W-2″.  So, how would you know if you haven’t seen it?

Now, the issue of an individual filing their own return.  I cannot find any specific rules against this.  However, here are a couple of things to keep in mind:

1. Not all information is on the pay stub.  The Employer EIN, for example, isn’t.  Got it on last year’s W-2?  Not so fast.  Sometimes employers change their EIN.  Also, the categorization of retirement contributions isn’t clear on the last paystub.  For example on the W-2 in Box 12A, 12B, 12C or 12D it usually has the letters A,B,C,D, etc. denoting what kind of retirement contribution it is.  There are other items as well that might appear on the W-2 that are not on the last pay stub.

2. Your YTD info on your pay stub might be wrong.  This could be for a variety reasons, like your employer changing software or payroll services during the year.  Sure, they should have reconciled everything and made it accurate but they may not have done that yet when you got the last pay stub.  Some payroll preparers double check all the numbers before sending out W-2′s and if they find an error and then correct it on the W-2 it would be different from the last pay stub.

In summary, paid preparers definitely need to see the actual W-2 and taxpayers filing their own return would be best served to wait for it as well.

Why Do We Demand To See Presidential Candidates Tax Returns?

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As you know, it has become commonplace for presidential candidates to release their tax returns to the public.  Of course, they are under no obligation to do so.  But, if they don’t, they are accused of hiding something.

The real question for me is, why do we feel like we have a right to see their private information?  Let’s think about the possible reasons for this.

1. We want to make sure they know how to prepare taxes.  Ummm, no.  They don’t prepare their own taxes.

2. We want to make sure they give money to charity.   This seems silly to me because any politician who is planning on running is going to make sure that they give to charity in advance, right?  Unless you’re John Kerry, Al Gore or Joe Biden.  John Kerry hardly ever gave anything to charity until 2003, the year before he ran for president and then he suddenly gave over $40,000.  Al Gore gave $353 to charity in 1997, while he was VP.  I guess things were just that tight for him.  And, of course, Joe Biden gave less than $1,000 per year to charity the ten years leading up to 2008 when he ran for president.  He didn’t bother bumping it up in 2007.

3.  We want to see how much their medical expenses are so we can make sure they are healthy.  This information is probably whited out and most people don’t go over the 7.5% threshold anyway, but even if they did and it wasn’t whited out you wouldn’t be able to tell for sure if the medical expenses were their’s, their spouse’s or their dependent’s.

4. We want to make sure they aren’t cheating on their taxes.  This also doesn’t make sense because how would you know?  You can’t tell by looking at someone’s tax return whether or not they cheated.  You would have to audit them and ask for backup documents.  Also, anyone who is planning on running for Governor, Senate, etc. is most likely not going to cheat on their taxes.  And, when they decide to run for President they certainly aren’t.  Most of these candidates have been in the public eye for years and years and know better than to try and cheat.  And, of course, they don’t do their own taxes anyway so in order to cheat they would have to lie to the tax preparer.

5.  We just want to know how much money they make.  Aha!  That’s it.  We want to know how much money they make compared to the percentage of tax that they pay so we can play class warfare.  But, does a presidential candidates income have anything to do with their potential ability to be president?  If success in your career is determined by the size of your income, wouldn’t we want a president to be extremely successful and have a very high income?  If that is the case, then why is it viewed as such a negative thing by the left that Mitt Romney has a high income?

I don’t really care how much money Mitt Romney makes, what percentage of it he paid to the U.S. Treasury, how much he gave to qualified 501(c)(3) charitable organizations, how much he spent on medical expenses or anything else that is suppose to be private.  I do care about what positions he takes on issues.