Romney Forgoes Full Charity Tax Break for 13% 2011 Rate
Republican presidential candidate Mitt Romney chose to pay more in taxes than he needed to, forgoing about $250,000 in deductions to keep his tax rate above 13 percent.
Romney claimed tax deductions for $2.25 million of the $4 million he made in charitable contributions in 2011, his campaign said yesterday before releasing his tax returns. The decision to pay more in taxes than necessary was political. Romney had told reporters that he hadn’t paid an effective rate of less than 13 percent over the past decade, in an effort to deflect Democratic attacks.
“It’s almost like he’s conceding, ‘Hey, no one’s going to want to see me go less than that 13 percent rate so I’m going to massage my deductions and actually forsake some of them to placate the American public,’” said Tony Nitti, a partner at WithumSmith & Brown PC in Aspen, Colorado, who prepares returns for high-income taxpayers. “I don’t know if it will placate anybody. The people who have issues with his tax rate are still going to have issues with his tax rate.”
Romney’s return is at odds with a July 29 statement in which the former private-equity executive said he didn’t think he would be qualified to be president if he paid more taxes than he owed.
“He has been clear that no American need pay more than he or she owes under the law,” Michele Davis, a campaign spokeswoman, said in a statement. “At the same time, he was in the unique position of having made a commitment to the public that his tax rate would be above 13 percent. He directed his preparers to ensure that he is consistent with that statement.”
Romney won’t file an amended return seeking a refund for the foregone charitable tax deduction, Davis said in an e-mailed response to a question.
“Governor Romney is showing us what he does when the public is looking,” Reid, a Nevada Democrat, said in a statement. “The true test of his character would be to show what he did when everyone was not looking at his taxes.”
Romney, 65, and his wife, Ann, paid $1.9 million in taxes on $13.7 million of income in 2011 for a 14.1 percent rate.
The Romneys make most of their income from investing an estimated $250 million fortune, and much of that income is taxed at a top rate of 15 percent rather than the top rate of 35 percent for wages. In 2011, Romney reported no income from wages, $6.8 million from capital gains and $3 million from taxable interest.
The Romneys donated more than 29 percent of their income to charity, including more than $1.1 million in cash to the Church of Jesus Christ of Latter-day Saints.
The investment tax breaks could have kept Romney’s effective tax rate below 13 percent, which last month he said was at least what he had paid over the past decade. To stay above that level for 2011, Romney didn’t claim all of the deductions for charitable contributions that he could, according to a blog post by Brad Malt, a partner at Ropes & Gray LLP in Boston who manages Romney’s investments.
Romney is a former Massachusetts governor and co-founder of Bain Capital LLC, the Boston-based private equity firm. His returns, which include three trusts, reflect the wealth, income and estate-planning profile of a small fraction of U.S. taxpayers with investments around the world.
In 2009, according to the Internal Revenue Service, about 1 in 17,000 households reported adjusted gross income exceeding $10 million.
In 2011, the Romneys had $5.5 million in carried interest, the campaign said. Carried interest is the profits share that private-equity managers receive, which is now taxed as capital gains. Obama wants to tax it as ordinary income, maintaining that it’s more like compensation for management than a return on investment.
“His effective tax rate every year is not a product necessarily of Mitt Romney and his creative tax planning,” Nitti said. “It’s a product of a tax system he’s been operating under the last 20 years.”
Romney had previously released his 2010 tax return, which showed that he paid a 13.9 percent rate on $21.7 million in income. Democrats have criticized Romney for not releasing more years of tax returns. Reid, who hasn’t released his tax returns, said he was told by someone with knowledge of Romney’s finances that he hadn’t paid any federal income taxes in some years.
Romney has refused to release more than two years’ returns, while on Aug. 16 telling reporters he paid a minimum tax rate of at least 13 percent in each of the past 10 years.
20.2 Percent Rate
Yesterday, the campaign released a letter from PricewaterhouseCoopers LLP, which prepares Romney’s returns, summarizing his filings for the past 20 years. During that period, from 1990 through 2009, Malt wrote, Romney’s average annual effective federal tax rate was 20.2 percent and the lowest rate he paid in that period was 13.7 percent.
The letter doesn’t say how much income Romney received in any of those years.
During much of that period, capital gains rates were higher than the current 15 percent. The rate dropped to 20 percent from 28 percent in 1997 and to 15 percent in 2003. Rates on ordinary income were higher during the 1990s than during the past decade.
“Of course he had higher effective tax rates in many of those years because the capital gains rates were higher,” said Clint Stretch, a tax attorney based in Washington and former managing principal of tax policy at Deloitte Tax LLP.
In 2011, Romney’s tax rate was comparable to those of middle-income families. His 14.1 percent rate includes income taxes and the payroll taxes he pays on self-employment income from speaking fees and other activities.
The middle 20 percent of households paid an average of 15.5 percent in taxes in 2011, including income taxes and both the employer and employee sides of the payroll tax, according to the Tax Policy Center, a nonpartisan group in Washington.
Romney’s rate was lower than the 26.4 percent paid by the top 1 percent of taxpayers and the 24.7 percent paid by the top 0.1 percent, or those with adjusted gross incomes of more than $2.2 million.
For 2011, the returns showed that the Romneys paid $1.3 million in state and local income taxes along with $214,728 in real estate taxes. They paid $674,512 under the alternative minimum tax, a parallel tax system that disallows some deductions.
Romney has proposed eliminating the AMT and lowering ordinary income tax rates by 20 percent, along with curtailing unspecified tax breaks for top earners.
The returns show that the Romneys have investments in funds located around the world, including Ireland, the Cayman Islands and Bermuda. They received $3.5 million in foreign income, according to the returns.
The returns no longer list Ann Romney’s Olympic dressage horse, Rafalca, as a business. In 2010, the couple claimed that the business, Rob Rom Enterprises LLC, lost $77,731 and generated a $50 deduction, with the remaining tax break potentially available for future years.
“In 2011, the activities of Rob Rom LLC were considered, for tax purposes, to be personal in nature and as a result the expenses are not reported on the 2011 tax return,” the campaign said in a statement in response to questions.
Romney aides wanted to put some distance between the release of the tax returns and the first of his three debates next month with President Barack Obama, which takes place Oct. 3 in Denver.
Call for More
In a statement yesterday, Stephanie Cutter, Obama’s deputy campaign manager, said Romney is still leaving voters in the dark.
“Why does Mitt Romney not just release the full returns, instead of the bare summary he has provided of the last 20 years, so voters can make their own judgments about Mitt Romney’s finances?” she said.
Obama and his wife, Michelle, filed their 2011 tax returns in April. They reported paying a 20.5 percent federal tax rate on $789,674 of adjusted gross income. They donated 21.8 percent of their adjusted gross income to charity.
Romney gave in to public pressure during the Republican primaries earlier this year to release his 2010 tax return, saying at the time that he would disclose his 2011 filing when it was completed. He had requested an extension and the return released today was due by Oct. 15.
The Romney campaign sought to use the release of the returns to return to talking about the economy.
“It’s time for us to discuss the real choice facing voters this year,” Virginia Governor Bob McDonnell said in a statement released by the campaign. “Mitt Romney and Paul Ryan are running to get America creating wealth again, while President Obama is running to redistribute wealth.”
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