On Tuesday, Republican presidential candidate Mitt Romney released his tax returns, setting off an intense flurry of commentary. If you’re angry that Romney only paid about 14% of his $21.6 million income in taxes, you’re not alone.
But if you channel your anger toward capturing some of the same tax benefits Romney used, you can save on taxes too.
How Did He Do It?
I won’t suggest that all of us should go join private equity firms. But many of the other ways Romney saved on his taxes are available to everyone.
First and foremost, Romney’s return shows how much better investment income gets treated than what you earn from your job. Not only does your paycheck get taxed at up to 35%, but you also have to pay a big load of Social Security and Medicare taxes on top of it.
On income from investments, you can forget about Social Security and Medicare. And if you invest in stocks or mutual funds that pay the right kind of dividends, you can cut your tax rate to as low as 0% on that income — if you’re in one of the two lowest tax brackets.
Once you’ve got some money invested, profits also get a lower tax rate — as long as you aren’t a quick trader. Hold a stock or other investment for longer than one year, and you’ll get a rate between 0% and 15% on any gains.
Finally, one of Romney’s biggest successes came from his retirement accounts. You won’t be able to match his multimillion-dollar IRA balance, but by putting your best investments in an IRA, you avoid having to pay tax on profits until you pull the money out. Meanwhile, you can get a nice tax deduction now for the money you put into an IRA or 401(k) plan at work.
No matter what you think about Mitt Romney’s taxes, it’s up to you to make sure that your own taxes are as low as they can be. By making smart investing a higher priority, you can earn yourself a big tax cut.
Tagged: 401k, capital gains tax, CapitalGainsTax, carried interest, CarriedInterest, Dividends, GOP presidential candidates, GopPresidentialCandidates, investment income, InvestmentIncome, ira, Local, Mitt