Lesson's From the President's Tax Return
On April 15, President Barack Obama and his wife Michelle released their personal tax returns. Those returns, available on the White House web site, reveal all sorts of valuable information. For starters, it pays more to write bestsellers ($5,661,666) than to be President ($374,460)!
The Obamas reported a total of $5,505,409 in Adjusted Gross Income (AGI) and paid $1,792,414 in tax. They made $329,100 in charitable gifts to a total of 40 organizations. The President also donated his entire $1.4 million Nobel Peace Prize award to another 10 charities. Directing the Nobel Committee to pay those charities directly was a smart move on his part, as it let him avoid including the prize in his AGI, which would have further reduced the value of his itemized deductions and personal exemptions.
We've always said that owning your own business is the best tax shelter left in America. The bulk of the Obama's income comes from their own business - specifically, writing. The President reported $5,661,666 on his Schedule C, before taking $487,889 in deductions - mainly for "commissions and fees."
However, he missed the opportunity to take advantage of several basic tax-planning strategies. For example, he paid $138,562 in self-employment tax on those royalties - a bill he might have trimmed considerably had he organized his writing business as a certain type of corporation or partnership.
Even without reorganizing his writing business, he could have created savings by hiring daughters Sasha and Malia to work for the business. The Tax Court says that business owners can hire children as young as seven - and the Tax Code says that wages a minor earns working for a parent's unincorporated business aren't subject to employment taxes.
The President might also have established a Medical Expense Reimbursement Plan, hired his wife Michelle, and compensated her in the form of medical reimbursements for himself, his wife, and his daughters. This would have taken the family's out-of-pocket medical expenses and moved them from Schedule A (where they're nondeductible because they don't total more than 7.5% of AGI) to Schedule C, where they would have been fully deductible.
Hiring Michele and paying her a salary would also have let the Obamas make tax-deductible retirement plan contributions on Michelle's behalf. The President appears to have made a maximum $49,000 Simplified Employee Pension contribution on his own behalf - but the return shows just $406 in income for the First Lady. However, this choice would have required him to weight the costs of paying Social Security tax on that income.
With millions of dollars in income, the Obamas can clearly afford top tax-prep services. But even they can profit from proactive planning. And it's just as true for you, even if you're not reporting millions in income.
