I have a few interesting hobbies — gardening, golf, riding Harleys and, yes, reviewing tax returns!
So, when President Obama released his returns, I felt kind of drawn in to see, from a financial planning standpoint, were there things that we could do to reduce his taxes, or provide him with a better overall plan?
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First, let's start with their basics:
After my review, here are the five biggest tax and planning issues I see for the Obamas:
1.Taxable interest. They received $6,575 in taxable interest from Treasury notes that are deductible on a state level (6 percent), but not on a federal level (33 percent). So, he is losing one-third of his gain in federal taxes. He should be looking possibly at Illinois muni bonds that would be exempt from state and federal income tax. This cost them $2,169. They should also look at moving funds into dividend-producing stocks. In his tax bracket, the tax rate would be less than half the 33 percent federal rate that he is currently paying (15 percent capital gains rate vs. 33 percent). They received no qualified dividend income in 2013.
2. Retirement plans. It looks like they have an SEP IRA plan that allows them to defer up to 25 percent of income — that is great. Moving to a 401(k) plan would allow them to do the 25 percent, plus an additional $17,500 (next year, since Michelle Obama is 50, she can do another $5,500 catch-up contribution). The additional $17,500 would have saved them an additional $6,650 in federal and state income taxes.
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3. Alternative Minimum Tax. One of the main reason people have issues with the AMT is because of high state income taxes, and high local property taxes. It seems to me that the Obamas have not lived in their home for five years, so it would probably be better to sell the home, which may help them avoid the AMT due to no local property taxes then showing up on their return. Not having this home would also save $29,176 in property taxes, $42,383 on interest payments, and who knows how much on maintaining the property. This could potentially be around $80,000 to $100,000 in annual savings. I am not suggesting that they sell their home to get out or the AMT. I am saying that if they are not going to be in a home for eight years, that is costing a lot of money to own, they should consider cutting this expense which may help them with their AMT issue.
4. Charity. They gave away $59,251 to various charitable organizations which was deductible (38 percent) and that deduction gave them back $22,515 in their pockets. The problem is that in order to give the $59,251, they had to earn $95,566 in income, then pay their taxes, to have that money to give to charity. It is not that tax efficient for them, and the charities only get 62 percent of what it cost the Obamas! If they used appreciated securities, they could avoid the capital gains at both the federal and state levels, giving them either more money to give or they can do the same amount for a lot less money.
5. Refund. They received a $19,108 refund for 2013 which does not mean that they "won," but rather they lost and got no return on a lot of money for 16 months. With proactive planning, the refund should be close to zero, meaning that you had your money in your pocket all year long. Getting a big refund means that your taxes were not planned out correctly. This means that each month, their cash flow was reduced by over $1,500 per month, which could have been used to fund college, retirement or just save for the future.
Now I realize that, with all the things on the Obama's plate, reviewing their returns for proactive tax strategies is right up there with picking up after their dog Bo. hat probably goes the same for almost everyone. You get your return, and as long as you do not have to write a very big check, then the taxes get put in a drawer and we do not think about it for the next 12 months. I get it — reviewing tax returns for most people is really not that much fun.
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Just think about this: You just had your returns done, so why not have your CPA or financial planner take an extra 15 minutes and walk you through them so you understand what is costing you money? What can you control and what can you not control? Are their things that you can change during the year that will actually put you in a better position for 2014? From what we have seen, the average person can generally save a few grand per year but just being proactive. My advice is to take the 15 proactive minutes and use the savings to take the family on a vacation.
A vacation is always better when it is paid for by the IRS!
Commentary by Jerry Lynch, a certified financial planner, chartered underwriter and chartered financial consultant (CFP, CLU, ChFC). He is president of JFL Total Wealth Management, a registered investment-advisory firm. Follow him on Twitter @JFLJerry.