Presidential candidate Mitt Romney’s recent disclosure of his tax returns can serve as an excellent point of discussion for California residents with their own tax concerns. A quick look at what Romney’s returns show might help people in California and elsewhere address their own tax issues should the IRS decide to audit. Specifically, the discussion of Romney’s tax returns has allowed for a debate to resurface over how investments are taxed and particularly how carried interest is treated.
Californians may know that carried interest is the profit stake that private-equity managers receive from good investments, even if the managers don’t invest their own money. Right now, carried interest is taxed at a capital gains rate, though many people want to that changed.
According to Romney’s 2010 return, $7.4 million in carried interest was included in his income. In 2011, the candidate, who has invested well in companies like Staples Inc. and The Sports Authority Inc., received $5.5 million in carried interest.
This carried interest comes from Romney’s time at Bain Capital LLC. It’s unclear, however, why his returns show that he received additional partnership interest in Bain funds, since his tenure with the company ended in 1999.
Romney’s return also shows that he carried forward $4.8 million in capital losses from prior years, which suggests that he might not have reported positive capital gains on his 2009 tax return. His campaign, however, only released his 2010 and 2011 returns.
For public speaking events, Romney has travelled a lot lately, but one tax attorney noted that he didn’t take travel deductions for the income he received for public speaking, showing that Romney has actually not taken all the deductions he might have.
Romney’s tax returns also reveal his sophisticated estate planning, as the millions of dollars he has given to his children are free of estate and gift taxes because of the type of trusts he set up. The candidate’s campaign said that his children were the beneficiaries of the trusts. Those trusts create an income on which Romney is obligated to pay a tax. His paying this tax effectively allowed him to legally transfer gift-tax-free money to his children.
Taxpayers in the Sacramento area and elsewhere may have similar issues related to their tax returns. Given the complexity of tax laws, and the severity of the potential penalties if such laws are broken, California residents will likely want to consult with an experienced tax law attorney to ensure that matters of estate taxes, international taxes, tax refunds, tax abatements or any other tax concerns are handled in full compliance with the law.
Source: Bloomberg, “Romney’s 13.9% Tax Rate Shows Power of Investment Tax Preference,” Richard Rubin and Jesse Drucker, Jan. 24, 2012