How To Get a Tax Refund For Earning Gobs of Money You Do Not Have To Report As Income 4

Mitt Romney payed less than 15% on his REPORTED income. What if his REPORTED income is actually far less than his real income, and it is all legal?

When Romney donates an appreciated asset to charity, he gets to deduct the full value from his income in the calculation of his net income. That means he gets to deduct what he paid for the asset plus whatever capital gain has occurred while he owned it.

He is not required to declare the appreciation in the asset as income and he has never paid taxes on that appreciation. However, he is allowed to use that appreciation to cut his taxes on his REPORTED income.

In other words, he has far more income than he is legally required to REPORT, and he gets to use that unreported, untaxed income to cut his taxes on his reported income. This is in effect a negative tax rate. The more the asset appreciates (the more he earns) the less he pays in taxes.

So not only does he tell you about his unfair lower tax rate than the tax rate paid by the ordinary, middle-class tax payer, he also has to report far less of his income than does the ordinary, middle-class taxpayer. Even Warren Buffet, who tells you it is unfair that he pays a lower tax rate than his secretary does, doesn’t tell you the full story of how much less he pays.

This is just another trick played on the middle-class by the very wealthy. You can use this trick too, but I am not sure if any of my readers can make millions of dollars a year, year after year, using this trick.

What do you think of a candidate who uses these tricks and yet pretends to the voters that they do not exist and that he doesn’t know about them?

The middle-class voter knows that she or he is being ripped off, but they don’t know the half of it. Would they appreciate a candidate that told them about the half they don’t know?

This is the same issue I mentioned in Comparing Taxes Paid By Past Presidents and Presidential Candidates. The facts about how to use this tax trick are documented in Donate Appreciated Assets.

I repost this because I think this way of stating it has far more impact than the description in my previous post. The headline is more catchy, too.

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4 thoughts on “How To Get a Tax Refund For Earning Gobs of Money You Do Not Have To Report As Income

  • SteveG Post author

    Suppose Mitt Romney decides that he has to follow the precepts of his religion and tithe 10% of his income to his church. So he decided that he is going to give $2.1 million last year.

    He finds that he has this fantastic investment from his vulture capital hedge fund. He has held it for over a year and it has appreciated so much that there is a $2 million unrealized capital gain. He has never had to report this as income because it is unrealized. He has never paid his 15% tax of $300,000. He also cannot use the money unless he realizes the gain and pays the tax.

    However, as a charitable contribution, he gets to deduct this $2 million from the income he does report.

    If he gave away $2 million from his reported income that he has already paid $300,000 in taxes, the deduction would reduce his taxes by $300,000. Just balancing out the tax that he paid. (This balance being the reason the tax code allows the deduction of charitable contributions.)

    If he gives away the appreciated assets that he could not use without paying taxes, he still cannot use the money himself. However, he does get a $300,000 tax deduction that he never paid $300,000 in taxes to earn. He also gets the praise of his church and bragging rights for having donated the money. He might even get a building at BYU named after him.

    That is tax money your government could have used to pay its bills, but thanks to Mitt’s generosity you get to make up the missing $300,000 with your taxes. At least he gets to put the money where he wants it instead of letting your government decide. And you also get to put the money where Mitt Romney wants it (and he isn’t even President yet) instead of the government paying off the bills it ran up in your name. Perhaps your government could have used the money to fix a bridge, or send it to a state to pay a teacher, or avoid having to cut your medicare, or continue to fund higher education at the levels it formerly did so today’s students wouldn’t have to rack up such huge debt.

    Maybe your government wouldn’t have to sell Mitt Romney a bond so that it could borrow the money back from Mitt to pay its bills and also pay interest on this money to Mitt and still owe him the principle on the bond.

    Moreover, Mitt Romney never has to say that he earned that $2 million dollars so you won’t have to feel so bad that he is making so much more money than you are. All you need to know is his reported income. You don’t need to know how much his net worth increased last year. You’d probably fall out of your chair if you knew, so he is protecting you from injury.

    Also remember that Mitt got to suck that money out of the economy and not use the money to create jobs for the length of time he held it.

    So even if you don’t think this is unfair to allow our wealthiest citizens to do this, you should at least wonder if this is good for the economy to let them do this.

  • Roger Goun

    Yes, I get that. But suppose instead of giving away appreciated stock, I had sold it and given away the entire proceeds of the sale. My income would be increased by the amount of the sale, and so would my deductions, so it’s a wash. It’s effectively the same thing.

  • SteveG Post author

    I think I may have to go through a numeric example. I had been thinking of doing that anyway.

    You don’t deduct the charitable contribution of the unrealized capital gain from the unrealized gain that you never had to report. You get to take the deduction of the unrealized capital gain that you never reported from the income that you do report.

  • Roger Goun

    If I make a gift of appreciated stock, I don’t get to benefit from the appreciation because I have given the stock away. The recipient gets the benefit. So why should I pay taxes on the appreciated value? Perhaps I am not understanding this correctly.