Tax Policy Center developed an interactive tool that analyzes the 2011 federal income tax returns of President Barack Obama, Vice President Joe Biden, Mitt Romney, and a typical middle-class married couple with children. The interactive tool displays the sources of income, taxable income, income tax liability, tax composition, and finally the effective tax rate. President Obama, Vice President Biden, and Mitt Romney all three reported income that put them in the top 5% of American households, but they ended up with very different effective tax rates. Two key factors that contributed to this difference in effective tax rates are the sources of income and the amount of deductions and exemptions.
All of President Obama’s income was taxed at the ordinary income rates, but he had deductions and exemptions amounting to 37.1% of his income, which helped reduce his effective tax rate. All of Vice President Biden’s income was taxed at ordinary income rates, and he only had deductions and exemptions amounting to 17.9% of his income, which resulted in him having the highest effective tax rate of the three. Mitt Romney had the best of both worlds with more than half of his income being taxed at preferred rates, and his deductions and exemptions amounted to 27.3% of his income. The interactive tool shows how three taxpayers in the same tax bracket can end up with very different effective tax rates.
Tax Policy Center Interactive Tool
In his 2011 State of the Union Address, President Obama stated that American taxpayers would be able to use an online tool to see how their federal tax dollars are spent. The receipt tool allows you to enter your federal tax burden or select an income estimate, and then it shows exactly how much of your federal tax dollars are spent on different expenditures.
Your 2011 Federal Taxpayer Receipt
Tax Foundation’s MyTaxBurden estimates your federal income tax burden under a variety of scenarios. Scenario 1 is the full expiration of all Bush-era and Obama tax cuts. Scenario 2 is the full extension of these tax cuts. Scenario 3 is President Obama’s plan to partially extend these tax cuts for families earning under $250,000 per year and single filers earning under $200,000 per year. This calculator will give you an estimate of your 2013 federal income tax burden.
Many Americans wish they could not only be as wealthy as Mitt Romney, but also use the tax planning strategies he has utilized to have such a low effective tax rate. Citizens for Tax Justice published a report with tax planning ideas taken from reviewing Mitt Romney’s previous tax returns. These tax planning ideas are:
- Don’t work for a living
- If you do work, disguise your compensation as capital gains
- Give to charity – but not cash
- Give to charity – but not now
- Give to charity – your own
- Use offshore investment vehicles
- Invest in sexier financial instruments
- Borrow money only to invest
- Be aggressive in your tax planning
- But don’t do anything illegal
For the complete report see this link
The IRS released a tax tip about choosing between the standard deduction and itemizing one’s deductions. The tax tip lists seven facts to consider when choosing between the two types of deductions, and the seven facts are:
- Qualifying expenses
- Standard deduction amounts
- Some taxpayers have different standard deductions
- Limited itemized deductions
- Married filing separately
- Some taxpayers are not eligible for the standard deduction
- Forms to use
For an explanation of each of the seven facts see this link
The current maximum tax rate on long-term capital gains is 15%. Capital gains have received preferential tax treatment when compared to ordinary income for most of the history of the income tax. Tax rates on capital gains and ordinary income were equal only for the first nine years of the income tax and for a short time in the late 1980s and early 1990s. The maximum tax rate on capital gains has not been as low as the current 15% maximum rate created by the Bush tax cuts since 1933 when the maximum tax rate on capital gains was 12.5%. The maximum tax rate on capital gains is set to increase to 25% in 2013, unless the 2001-2010 tax cuts are extended or the healthcare act is changed.
For a graphical representation of the historical maximum tax rates on capital gains and ordinary income see this article
For related information see my post from two weeks ago on the taxation of gift bags at award shows