Thursday, September 27, 2012

How to get the same tax breaks that Romney did

By Linda Stern,Reuters

WASHINGTON -- Much was made of multimillionaire candidate Mitt Romney's tax status when he released his 2011 tax return on September 21. It showed an effective tax rate of 14.1 percent; many middle-income working Americans and the average wealthy person pay at higher rates than that.?

To be sure, tax experts didn't find anything illegal or underhanded about Romney's return. In fact, he and his wife, Ann, could have had an even lower tax rate had they not left money on the table, declining to take his full deduction for charitable gifts.

But there's no need to get mad when you can get even: Middle-income taxpayers can use a lot of the same write-offs that Romney used, and they don't have to go to Switzerland or the Cayman Islands to do it.

Here are some ways that the uber-rich cut their taxes that you can use, too.

Invest in stocks directly
Middle-income people tend to make most of their investments via mutual funds and 401(k) plans. Those retirement funds do give you an immediate write-off of your contribution, but here's what else they do: They turn capital gains, taxed at a maximum rate of 15 percent, into ordinary income, taxed at a maximum rate of 35 percent.

And mutual funds that own portfolios full of stocks are required to distribute their taxable gains annually. Average investors who own mutual funds (outside of tax-deferred retirement funds) therefore have to pay taxes on those gains every year, whether they sell shares and withdraw money or not.

Here's the way rich folk do it: They buy shares of solid dividend-paying companies directly. They take the dividend income, also typically taxed at a 15 percent maximum. They let the stocks roll. When a share price falls, they sell the stock at a loss, and use the loss to offset other gains. When they eventually sell stocks that have long-term gains, they only pay 15 percent tax on the gain.

Work for yourself
Romney made his fortune and avoided big taxes by founding his own investment company, Bain Capital. But even small kitchen-table businesses confer tax breaks on their owners. If you turn your hobby into a business, work as a consultant, or provide services like childcare, lawn mowing or driving, you can cash in on some of them. Self-employed people can buy all of their equipment, supplies and services and deduct the costs; they can travel to conferences and clients and write off their trips. They can deduct the cost of their health insurance and the costs of acquiring and maintaining a home office.

More importantly, they can set aside more money on a tax-deferred basis than the typical employee. Using defined benefit retirement plans and simplified employee pensions, people who own companies can set aside substantial amounts of money for their retirement. When they leave (or simply close) their companies, they can roll that money over into tax-deferred individual retirement accounts.

Be charitable
As Mormons who tithe and go beyond that with big gifts to numerous nonprofits, the Romneys have substantial charitable donations that are tax deductible. They didn't even take full advantage of that write-off on their 2011 tax return; perhaps to avoid having to show a return with an effective tax rate near 10 percent, according to some reports.

But the charitable deduction is a valuable one for less well-heeled taxpayers, too. People can donate money to groups that advance their own policy stances, such as Planned Parenthood or Project Ultrasound. They can donate to their own religious organizations, or their children's private schools and camps, or their local library and symphony orchestra. And so, they can reap benefits from those donations, and still deduct them from their taxable income.

In addition, individuals can reap surprisingly substantial deductions by donating their old clothing, housewares, electronics and vehicles to charitable organizations.

And those stocks that have accumulated big gains? If you give a charity an appreciated stock, you can deduct the whole gift and you don't have to pay money on the gain. So, shares worth $1,000 that you paid $500 for can be deducted at $1,000 when you give them away to a legitimate nonprofit.

Help the kids
The super wealthy are widely known to use trusts and other estate-planning vehicles to transfer money to their children and grandchildren in ways that avoid taxation. But less wealthy folks can do that too. Children are allowed to receive up to $1,900 in investment income before it is taxed at their parents rate. If your children are older than 19 (or over 24 if they are full-time students) and earn $35,350 or less, their tax rate on capital gains is zero. You can give them those same appreciated stocks and they will owe no taxes on the gain.

If you decide to do that, do it this year; the zero percent capital gains tax rate expires at the end of 2012, and it's renewal is far from certain.

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Source: http://bottomline.nbcnews.com/_news/2012/09/26/14114172-how-to-get-the-same-tax-breaks-that-romney-did?lite

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