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Mitt Romney’s Tax Rate – Behind the Numbers

by Melissa Rager

Mitt Romney, the Republican Presidential nominee, recently released a copy of his 2011 individual income tax return.  The Romney’s effective tax rate – total tax owed ($1,935,708) divided by adjusted gross income, or AGI ($13,696,951) – for 2011 is 14.13%.  You may be wondering how your effective tax rate is higher than Mitt’s, so let’s take a look at three key parts of Romney’s return that drives the rate.

First, $9,032,132, or 66% of his AGI is comprised of qualified dividends and capital gains which are taxed at 15%, irrespective of his marginal tax rate.  The $9 million of qualified dividends and capital gains has already been taxed at the corporate level at 35% and are again being taxed at the individual level at 15%, which equal an effective rate of 44.75%.  If this income was considered ordinary, it would have been taxed at the top marginal rate of 35% on Romney’s individual return instead of the double taxation rate of nearly 45%, which is split between the corporate level and the individual level.

Second, the tax is calculated based on his taxable income which is his AGI less itemized deductions of $4,681,842 and personal exemptions of $7,400.  The itemized deductions are made up of three different items:

  1. $1,541,905 is related to state and local income taxes and real estate taxes; amounts paid to other governmental jurisdictions that are allowed as a deduction on his federal income tax return.
  2. $2,250,772, or nearly 25% of his AGI, is related to charitable contributions.  Another way to look at this is instead of being charitable to the government by paying more in taxes, the Romney’s chose to be more charitable to organizations they view important to their values.  Note, the Romney’s actually made charitable contributions of $4,020,772, or nearly 30% of their AGI, but chose to deduct a lesser amount presumably to increase their effective tax rate.
  3. $889,165 is related to investment interest expense and investment expenses.

Third, the Romney’s are claiming a foreign tax credit of $102,790 which is taxes paid to foreign jurisdictions.  Of this amount, $83,853 is foreign taxes paid in 2011 and $18,937 is foreign taxes paid in prior years which were disallowed as a foreign tax credit due to being limited.  This credit is allowed before arriving at total tax owed to the federal government.

To summarize, the Romney’s federal effective tax rate is 14.13% in large part due to two-thirds of their income being double taxed at the capital gains rate of 15% and a $4.7 million itemized deduction.  When factoring in taxes paid to state and local jurisdictions ($1,541,905), total charitable contributions ($4,020,772) and taxes paid to foreign jurisdictions in 2011 ($85,853), in addition to their total federal taxes ($1,935,708), the Romney’s paid a total of $7,584,238 in taxes and charitable contributions in 2011, or 55.37% of their AGI.

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One thought on “Mitt Romney’s Tax Rate – Behind the Numbers

  1. Greg G.

    Thank you for this well laid out discussion of the facts concerning Romney's taxes. Contrary to what I've heard in the media and from certain politicians, it appears as though Romney followed the law when he arrived at a 14% ETR. It also appears that he is much more charitable than the average person (and the politicians criticizing him) in both absolute terms and as a percentage of total income. It's always nice to see a CPA inject some "cents" into an otherwise senseless debate.


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