Mitt and Ann Romney released their 2010 tax return last week. After examining, we can find many tax saving strategies:
- No (or the least possible) payroll tax – avoid income such as salary, wages and tips;
- Maximize qualified dividend – capital gain tax is 15%;
- Harvest capital loss – the loss could offset capital gain and carry forward indefinitely;
- Maximize charitable contribution – cash and non-cash and carry forward for 5 years;
- Minimize AMT tax – relatively large deductions could trigger AMT tax.
Certainly, I have not exhausted every strategies Romney explored. Yet, one noticeable deduction he did not claim is the home office deduction. The possible reason could be
- A set of tests need to be satisfied – IRS Tax Tip 2011-53 listed six things to check;
- Records keeping – it’s tedious, but it’s the best defense available for IRS audit;
- Complication with home sale or exchange – he may not get full benefit of gain exclusion.
The deduction also waves red flag in the face of IRS when
- tests are partly satisfied due to confusion;
- records could not be substantiated.
Most taxpayers want every deduction possible, and those with Schedule C often ask for home office deduction. Yet, through my experience, I know that optimizing part of tax return does not always lead to total tax saving. It depends on each situation.
Based on information available and cost & benefit factors, I think team Romney made a wise decision to skip the hustle and cut audit risk.