06 Aug How can Hillary and Bill reduce their taxes?

by Jerry Lynch, CFP, JFL Total Wealth Management

So some people relax by reading, going to a gym or just taking a walk. I like to review tax returns as it really shows what is happening below the surface and it gives me ideas on what I can do to help others lower their taxes.

The Clintons just released their tax returns, so I feel obligated to see what I can do to help the Clintons reduce their tax liability. Generally I review two years of returns to see if there are trends that I need to be aware of. Here is what I am seeing:

Total Income: For 2013 and 2014, their total income was $27 and $28 million dollars. This puts them in a 39.6 percent federal tax bracket. New York State charges them 8.82 percent. On top of that, there are the new Obamacare surcharges that add an additional .9 percent on earned income and 3.8 percent on investment income. What this means is that for every additional dollar they earn, they lose about half (49.32 percent). For investment income, every additional dollar they earn, they lose 52.22 percent. If you lose half of your money in taxes, you need to have a proactive tax plan.

Interest Income: This is money in a bank and generally banks are paying nothing. Let’s assume for argument’s sake that they are averaging half a percentage point. In 2013, they received $27,143 in interest and in 2014, they received $25,171. In 2014, their interest income cost them $13,144 in taxes. Assuming half a percentage interest rate, they should have about $12.5 million in cash in the bank, which is way too much.

Planning Tips:
— Why not look into New York State muni bonds? They are exempt from federal and New York State income tax and pay pretty competitive rates for high income earners.
— Why not invest some of the money in dividend-producing stocks? The S&P has a yield of 2.01 percent, and that yield is taxed at the capital gains rates instead of the ordinary income rate. What this means is that their tax rate would drop from 52.22 percent to 32.62 percent. That is about a 40 percent reduction in their tax liability, plus the yield is four times that of the interest rate on their cash!

Business Income: In the past two years, I see $27 and $28 million in business income. In reviewing the Schedule C (which reports business income), there are a few things that could have a big impact on their income.
— 401(k): Both Hillary and Bill have their own businesses, which means that they can put aside $59,000 each ($53,000 plus a $6,000 catch-up contribution because they are over age 50). This would save them around $59,000 in taxes annually.
— Pension: On top of the 401(k), they can also do a pension plan that allows for much larger contributions than traditional 401(k) plans. The older you are and the higher your income, the larger the tax deductions and contributions that you can make. Easily, they could get an additional $250,000 each in deductions, saving them around $250,000 in taxes annually.
— Long-term care: Owners of companies (both Bill and Hillary have LLCs) can deduct the cost of long-term care insurance policies as a business expense and it is an “above the line” deduction on their personal taxes. Because they are both over 60, they can both get a $3,800 deduction each, for a total of $7,600 annually. This would save them around $3,800 in taxes. This deduction increases to over $9,300 after they hit age 71.
— Why not an “S” Corp? In a LLC, all wages are subject to Social Security and Medicare taxes. While they are way above the limits on Social Security wages, they still have to pay Medicare tax (1.45 percent as both an employer and employee, or 2.9 percent combined). They had about $13 million in profits that cost them an additional $377,000 in Medicare taxes. If the businesses were “S” Corps., they would have to take a “reasonable salary,” and any additional profits would not be subject to Medicare taxes.

Loss carry-forward: I am seeing a $3,000 loss, which indicates to me that they have a long-term loss carry-forward (-$702,540). We can use this to offset ordinary income with a maximum of $3,000 per year (which will take 234 years) or we can take some gains and use that loss to offset any taxes, which would be much better (and a lot faster).

Charitable Contributions: Cash is probably the least effective asset to give to charity and they gave around $3 million last year. So this is how it works using the $3 million that they gave to their foundation in 2014:

Gift – $3 million
Earned Income: Approximately $6 million
Pay taxes of approximately $3 million
Gift to charity of $3 million
Deduction: $3 million with tax savings $1.5 million

If they used appreciated securities, they would not have to pay capital gains on the gain and they’d get the same tax deduction on the value of the gift. That would save them around 33 percent on the gain in their investments.

Conclusion:

I am not here to pick on the Clintons for political reasons. I’m personally an independent so I think that there are idiots on both the Republican and Democratic side. I review tax returns as that is what I do, looking for ways to reduce their tax liability. Specifically with the Clinton’s, with some proactive planning, they could save hundreds of thousands of dollars and probably get much better returns than what they are getting now.

For most people, tax planning is getting your receipts, putting them in a shoe box and giving them to your CPA. If you get money back, your CPA is great. If you have to pay, you yell at your CPA and tell them that they better get their act together or you are going to get fired. That is not tax planning. That is scorekeeping.

Proactive tax planning means that you review your tax situation today, and develop plans to be proactive during the tax year! You have five months left in the tax year. What is your proactive tax strategy?

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 August 2015.

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