Romney's tax prep blunder

Republican presidential nominee Mitt Romney and President Barack Obama talks after the first presidential debate at the University of Denver, Wednesday, Oct. 3, 2012, in Denver.
AP Photo/Charlie Neibergal

Commentary:

(MoneyWatch) Mitt Romney's strong performance during last week's presidential debate has given his campaign new life. But that may only intensify certain questions regarding the Republican nominee as the race heads into the home stretch.

Questions, as Romney's critics have repeatedly noted, like what voters should make of his modest federal income tax rate. The attractive 14.1 percent Romney paid out on his $13.7 million adjusted gross income in 2011 bolsters the critique that he is comfortable with middle-class Americans paying higher rates than the rich. By some estimates, Romney's rate would have been 12 percent had he chosen not to take $1.8 million in deductions he was entitled to claim.

Obama, on the other hand, earned nearly $790,000 last year and paid $162,074 in federal taxes, a rate of 20.5 percent. Put another way, Romney missed a golden opportunity to save himself taxes while simultaneously having the same tax rate as Obama.

This tax blunder was pointed out to me by Gregg Polsky, a tax professor at the University of North Carolina School of Law. He notes that Romney could have used a technique called a Roth IRA conversion to be taxed at a higher rate in 2011, while saving himself money in later years.

Here's how it would have worked. Money contributed to a traditional IRA is tax-deductible for the year the contribution is made. The taxes are not payable until the money is withdrawn. Another option all IRA holders have is to convert some or all of the IRA money to a Roth IRA. Taxes must be paid in the year the IRA is converted, but from then on this money and all of its growth is forever tax free.

While I use this Roth conversion tactic myself, I don't have an IRA valued at $20.7 million to $101.6 million, as Romney has disclosed. Had Romney converted only $5.9 million, he would not only have paid the same 20.5 percent rate as Obama, but also wouldn't have needed to pay taxes on that sum and income from that money again. He also could have converted an extra $1.8 million free by just taking the $1.8 million in deductions he skipped in 2011, possibly to bump up his tax rate for voters.

Under current law, In five years Romney will be forced to start taking out his IRA money, so these taxes would have to be paid pretty soon, anyway. And the tax rate then could possibly be much higher.

Romney could have easily put himself in a tax rate as high, or even higher than Obama and saved himself taxes in the long run. It could have made him look like he was paying his fair share of taxes, under anyone's definition, while saving himself from a larger tax bill in the future. That's a huge tax blunder in my book.

I tried reaching the Romney campaign for comment, but they did not respond. When I asked Polsky if he would be available to give Romney personal tax counsel in the future, he responded "Sure, it looks like he'd be able to afford my hourly rate."

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.