Earlier today, President Obama released his 2013 federal and state tax returns. The President’s return remains remarkable in just how unremarkable it is; quite frankly, most tax preparers would happily trade the return they’re working on at this very moment to crank out President Obama’s Form 1040. It’s that simple. Let’s take a look…
I don’t feel so bad about not getting a raise last year, because neither did the President. Of course, to borrow an old quote from Babe Ruth, I had a better year than the President did.
The President’s self-employment income from his book sales plummeted from $258,722 in 2012 to $104,000 in 2013, though to be fair, he did have stiff competition in the autobiographical market with Morrissey’s creatively-coined “Autobiography.” His effective tax was 20.4%, consistent with the 18.4% he paid in 2012.
Because the President’s book revenue was down, he contributed $90,000 less to the Fisher House Foundation, an organization that helps military families. There has been a direct correlation between President Obama’s book revenue and contributions to the foundation for several years, so the decrease in both does not come as a surprise.
Once again, the President shows no inclination to invest in the equities market, generating a whopping $3 of dividend income. Things aren’t much more aggressive in the bond market, where he earned only $6,575 of interest income. It makes you wonder where the President has parked his money; personally, I’d like to think that he’s carefully hidden it around the White House grounds, and only Nicolas Cage is capable of finding it.
Now, let’s get to the good stuff. As you may remember, 2013 was a pivotal year in tax policy. Beginning on January 1st, a series of tax increases proposed and signed into law by President Obama came into effect, including:
- A new maximum rate on ordinary income of 39.6%. The rate applies only to taxable income in excess of $450,000 (if married filing jointly, $400,000 if single).
- A new maximum rate on qualified dividends and long-term capital gains of 20%, but once again, only if the taxpayer’s taxable income exceeds $450,000/$400,000.
- A resuscitated limitation on itemized deductions; taxpayers with adjusted gross income in excess of $300,000 (if married filing jointly, $250,000 if single) lose 3% of most itemized deductions (maxing out at 80% of itemized deductions) for each dollar adjusted gross income exceeds the threshold.
- A taxpayer’s personal exemptions are phased out once adjusted gross income exceeds the $300,000/$250,000 thresholds. Mechanically, once a married taxpayer has adjusted gross income in excess of $400,000, the exemptions are gone.
- A new payroll tax was born. Starting in 2013, taxpayers with earned income from wages or self-employment income in excess of $250,000 (if married filing jointly, $200,000 if single), will pay an extra 0.9% Medicare tax on the excess earnings.
- Lastly, and perhaps most famously, taxpayers with adjusted gross income in excess of $250,000 (if married filing jointly, $200,000 if single), will pay an extra 3.8% surtax on “net investment income,” which includes items such as interest, dividends, capital gains, rents, and royalties.
So how did the President’s law changes personally affect him? Very, very, little.
Because his taxable income came in at $333,329 – well below the $450,000 level where the new 39.6% tax rate kicks in – he remained subject to the same 33% marginal rate he paid in 2012. At his level of taxable income, the higher tax rate on long-term capital gains and qualified dividends -- of which the President had none – is not applicable.
The President did feel the sting of the limitation on itemized deductions, however. Because his adjusted gross income was $481,098 – well in excess of the $300,000 threshold – he lost $5,433 of his $153,000 of itemized deductions (3% * ($481,098-$300,000)). This law change would end up not impacting his overall tax liability, however, because as in prior years, the President was subject to the alternative minimum tax, where this new itemized deduction reduction is permitted.
With wages of $395,000 and self-employment income of $100,000, the President was also subject to the new 0.9% payroll tax. To be precise, he paid an extra 0.9% on his earned income of $495,000 less the $250,000 threshold, or $245,000, amounting to $2,174 in extra tax liability.
Lastly, the President was subject to the new 3.8% tax on net investment income, but just barely. With only $6,575 in interest income, the President’s return is almost completely bereft of “net investment income.” The President is able to offset this amount in computing his exposure to the 3.8% surtax by his $3,000 capital loss carryforward, however, limiting his exposure to $3,575 * 3.8%, or $136.
Perhaps the most remarkable aspect of the President’s return is the fact that the Form 8960 correctly computed his exposure to the 3.8% surtax. While the final regulations under Section 1411 permit a taxpayer to reduce other forms of net investment income by the net capital loss of $3,000 permitted by Section 1211, it has been my experience – and the experience of countless other tax advisors – that most tax software platforms are NOT capturing this change to the final regulations correctly.
Ultimately, the President found himself fairly within the alternative minimum tax sweet spot once again, paying $9,513 in AMT. One interesting note for tax geeks: if you look at the President’s taxable income in 2012 and 2013, you will find it’s nearly identical: $333,000 in both cases. Despite this fact, President Obama had a tax liability (pre credits) of $108,000 in 2012 when compared to $95,000 in 2013. Thus, his tax liability went DOWN on the same amount of taxable income, even though he was subject to several new taxes and phase outs. What gives?
The AMT is a fickle mistress. In 2012, President Obama’s $333,000 tax liability was AFTER personal exemptions. These exemptions, which amounted to $15,200 in 2012, are not permitted in computing AMT. In 2013, because the exemptions were phased out under the new law described above, President Obama got no benefit from the exemptions in computing his regular taxable income, and thus was not subject to an addback in computing AMT.
In addition, the President paid more in state tax in 2012 than he did in 2013. State taxes are not permitted in computing AMT; meaning the addition to regular income in computing AMT income was larger in 2012 than 2013. When it was all said and done, even though President Obama’s taxable income was identical from 2012 to 2013, his AMT income was $413,000 in 2012 compared to $379,000 in 2013, and his resulting AMT liability $108,000 in 2012 compared to only $95,000 in 2013.
If that feels like a lot of words to spend on the President’s tax return, be thankful I’m not writing about President Romney. I’d make War and Peace look like Hop on Pop.
Follow along on twitter @nittigrittytax.
