4 Lessons from the Obamas' 2010 Tax Return

President Obama and First Lady Michelle Obama saw their income drop 67 percent last year, according to their just-released 2010 income tax return. Yet at a hefty $1.73 million in adjusted gross income, they're not exactly feeling the pinch, a point the president made in last week's fiscal policy speech when he said raising taxes on the wealthy should be part of any plan to rein in the federal debt and reduce the deficit:

"At a time when the tax burden on the wealthy is at its lowest level in half a century, the most fortunate among us can afford to pay a little more. I don't need another tax cut. "

Even if the Obamas make a tad more than you're pulling in, there are still some interesting takeaways to be gleaned from their 2010 tax return:

1. Diversify your income sources. The $453,770 the Obamas owed in federal income tax last year is actually more than the $400,000 the president makes from his day job as commander-in-chief. The bulk of the Obamas' 2010 income was from book royalties from his two bestsellers, Dreams From My Father and The Audacity of Hope. The president raked in a gross $1.57 million in royalties.

OK, so maybe you're not in a position to parlay an international platform into a best-selling book. But as MoneyWatch's Robert Pagliarini explains, you can most definitely up your income by making the most of Your Other 8 Hours including turning a hobby into a second income stream.

2. Make the most of tax-deferred investing. Based on the income from his side-business as a best-selling author, the president invested the maximum $49,000 in a self-employed retirement account. And back in 2007, the Obamas made large contributions to tax-deferred 529 college savings plans for their daughters Malia and Sasha, a move that continues to play out on their 2010 tax return. That year the Obamas made lump sum contributions of $120,000 to each daughter's college fund, but they will owe no gift tax on those sums since they are using a 5-year reporting schedule that allows them to report the gifts as annual $12,000 per-parent gifts to each child, the maximum allowed without triggering the gift tax. (When the Obamas made those 529 contributions, the annual limit on gifts that fly under the gift tax radar was $12,000 per person, but it's now $13,000.)

3. Grab the itemized deductions (while they last?). In his speech last week, the president reiterated his belief that itemized deductions for the wealthiest 2 percent of Americans should be capped at a 28 percent rate, not the (current) top income tax rate of 35 percent.

"....while I agree with the goals of many of these deductions, from homeownership to charitable giving, we can't ignore the fact that they provide millionaires an average tax break of $75,000 but do nothing for the typical middle-class family that doesn't itemize."

The Obamas' tax break from itemized deductions was in fact a whole lot more than $75,000. The couple listed a total of $373,289 in itemized deductions, with the breakdown as follows:

• Charitable contributions: $245,075
• State income tax: $52,527
• Mortgage interest: $49,945
• Property tax: $25,742

At a 35 percent rate, that works out to a $130,000 tax break. If a 28 percent cap was in place -- and to be clear, there will be a battle royale over any such change -- the value of their itemized tax breaks would fall to about $104,500. It should be noted that the Obamas admirably gave 14 percent of their income to charities last year, up from 6 percent in 2009. The national average is less than 3 percent. In fact, the dollar amount of their giving in 2010 surpassed their 2009 joint contributions of $329,100, even though they earned about $3.7 million less last year (In 2009 the president also donated his entire $1.4 million payout from winning the Nobel Peace Prize, which he didn't have to include on his tax form.)

4. Don't be shy about claiming your business expenses. On Schedule C of the Obamas' 1040, they report a hefty $184,511 in commissions and fees as business expenses (oh, to be the literary agent to the leader of the free world). But right next to that hefty expense was $853 listed as an office expense. Rich or not, business is business.

• Lessons from the Obamas' 2009 Tax Return
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