15 Apr 7 Ways President Obama Can Reduce His Personal Income Taxes
by Jerry Lynch, CFP, JFL Total Wealth Management
We all have our hobbies. Some like to fish or go to the gym, maybe play a little golf.
I like to review tax returns and if one pops up, let’s say like President Obama’s, I feel obligated to review it to see if he paid more than he needed.
Most people spend almost no time proactively planning for their taxes, which generally is one of the largest expenses that all of us have. The process generally starts in February when you throw a bunch of 1099s into a shoebox, think of a few creative ideas to say to your CPA to justify some expenses, then hope for the best. Hope is not a plan!
Now just because you can do something to reduce your taxes, it does not necessarily mean that you should do it! It has to make sense with the rest of the plan. In addition, reviewing a return generally shows other issues that you may want to consider relating to how you are spending and investing your money.
So if we were proactive, what could we potentially save in taxes — assuming that we were the President?
First, let’s start with President Obama’s tax numbers by looking at a copy of his return. Last year, the Obamas had $477,383 in adjusted gross income, and this is how their taxes broke out:
• Federal: $90,894 (that includes $10,087 in additional taxes due to the Alternate Minimum Tax (AMT))
• Self-Employment Tax: $2,362 (they get a credit for half of that, or $1,181)
• State Income (IL): $24,819
• Real Estate Taxes: $29,571 (up almost $3,000 from 2013)
• Total: $146,465 (This is what we call being very patriotic!)
This puts the president in a 33 percent federal income tax bracket and he pays 15 percent on capital gains. He is also subject to the Obamacare surcharges, which add an additional 0.9 percent on earned income and 3.8 percent on investment income above $250,000 for families. Finally, he is a resident of Illinois so we have an additional income tax of 5 percent.
So here are his marginal (top) tax rates.
• Earned income: 38.9%
• Capital gains: 23.8%
As we review the return, these rates are very important to know to understand the after-tax rates of returns.
Here is what I see:
1. Taxable Interest: $16,092 (gain) x 38.9% (tax rate) = $6,259.79 (taxes paid).
His total return, after taxes, was $9,832. He is mainly invested in U.S. government securities that are taxable at the federal level. He would probably be better off in Illinois municipal bonds, which are exempt from federal and state income taxes, and the returns are very competitive as well.
2. Qualified Dividends: $0
These are dividends that come from stocks such as AT&T. They get taxed at capital gains rates, which is about 40 percent less than his earned income rate. Also, just using the S&P 500 as an example, the current dividend of the S&P is 1.94 percent, which is about the same as the 10-year Treasury yield. Better tax rates, better potential upside. This also tells me that the president has very little if any stock investments in his portfolio and that has cost him a lot of money over the past six years. We should probably review his portfolio allocation as well.
3. Capital Loss: $3,000
This indicates to me a long-term capital loss carry-forward, and his return indicated a carry forward of $109,057. This is a planning opportunity as it allows us to offset capital gains in our portfolio. I would suggest that we proactively sell gains in the portfolio to offset that loss, so we can get the tax deduction sooner rather than later.
4. Self-employment Income: $88,181
This is from his books. They did do a SEP contribution of $17,400, which is great, however, they did not do the maximum deduction of 25 percent of income. They could have deferred almost $5,000 more. In addition, if they did a solo 401(k) plan, they could have done $17,500 plus an additional catch-up contribution of $5,500, plus an additional 25 percent of income. This would have allowed them to more than double their deduction for 2014 and save for their retirement. We should at least explore this option
5. Overpayment: $25,641
You should never be getting back checks this size. This means that your returns and income were not planned out correctly and you got a 0 percent return on your money for 15 months. This was even larger than last year’s overpayment, so this needs to be better planned out!
6. Mortgage Interest: $39,566
Here is my concern. Let’s assume that his mortgage interest and property taxes ($29,571) have been the same over the past six years. That would mean that they have paid $69,137 annually for six years (total cost: $414,822) just in property taxes and mortgage interest for a home that they have not been in for six years. This property is worth approximately $1.6 million, so the additional maintenance on the property is around 1 to 4 percent of the value of the home. Let’s use 2 percent, which is an additional $32,000 annually ($192,000 over six years). So over the eight-year period of time that he will be president, the property would cost $809,096. He would have been much better off selling the home and investing the additional $809,096 over the eight-year period of time.
7. Charity: The Obamas gave $70,712 to charity last year to some great organizations.
For any of my clients who give to charity, I look to do one of two things: either allow them to give more at the same cost or to give the same amount and have that cost them less. Generally, cash is the worst thing to give to a charity from a tax standpoint. I would rather see them give appreciated securities or actually transfer ownership of the book rights into a charitable trust. This would substantially reduce their taxable income and help them support their charitable causes in a more efficient manner.
I realize that the president does not want to be very aggressive in tax planning as it would not look too good if he did. I get that. When I review tax returns, I see the opportunity to at least have the conversation to decide if we consider changes based upon their tax and personal situation. Specifically with the president, there are hundreds of thousands of dollars (if not more than $1 million), over this eight-year period of time that we need to at least discuss to see if it is an option.
So how can this article help you? My advice is to bring your 2014 tax returns to your next financial advisor meeting and say, “Walk me through this and what we should be doing differently based upon my tax situation?” Investment and tax advice have to change based upon the tax bracket and situation that an individual is in. If your advisor does not understand your return and can’t point out what needs to happen differently, then you need a new advisor. Also, more likely than not, their advice is not appropriate and the portfolio is set up wrong. Take some time and have someone explain this to you. You don’t get a medal for overpaying your taxes!
Jerry Lynch is a certified financial planner with JFL Total Wealth Management. He may be reached at or (973) 439-1190.
This story was first posted in April 2015.
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