With Mitt Romney, though, we have a different kind of animal. As a managing partner in Bain Capital, LLC, he routinely engaged in relatively complex transactions, held bank accounts offshore, and even had a self-directed IRA, in which he employed leverage and, apparently, a “blocking company” that allowed Romney to avoid paying “unrelated business income tax” that’s normally levied by the IRS on any gains in IRAs (or non-profits, for that matter) attributable to private enterprise or borrowed money.
These kinds of things aren’t terribly unusual among very high net worth people of any political stripe. But it’s regular Joes like us that cast votes in the election, so let’s take a closer look. The New York Times recently took a look at the blocking corporation technique, here. The criticism, of course, is that by parking assets offshore and using a blocking corporation, Romney is using techniques available only to the wealthy to avoid paying his fair share of income taxes.
The defense, on the other hand, is that this technique is not illegal at all. Far from it: It’s also common among labor unions, pension funds and charities, and their middle class beneficiaries benefit from the technique, as well, since it eventually means bigger pension payouts or charitable contributions. The NY Times makes liberal use of the term “tax avoidance,” and I suppose they think we’re supposed to connote something sinister from it.
Well, let’s bring this back down to earth, for regular Joes like us: Tax avoidance is legal. It’s also prudent. Tax evasion is not prudent, is illegal by definition, and could land you in jail.
As a financial planning practitioner, I work with clients and their tax advisors all the time on strategies like the use of retirement accounts, taking mortgage interest deductions, itemizing miscellaneous expenses, estate planning, life insurance planning, and choosing the most tax-efficient business entities, education funding, and scores of other ideas with one goal in mind: Helping our clients maximize their after-tax, spendable return. In most cases, that means working to minimize the amount of taxes they pay, through any legal means available. That’s our job. That’s why we’re worth our fees, many times over, in most cases.
We do not assist clients with concealing income, using illegal tax shelters, or condone or facilitate fraud. That’s tax evasion, and it’s a crime.
In the case of Romney’s blocking corporation, yes, some members of Congress think they should close that loophole, which, according to the New York Times, deprives the U.S. Treasury of about $10 billion per decade. Well, maybe they should prohibit using blocker corporations to avoid unrelated business income tax and maybe they shouldn’t. But so far, they haven’t closed it. Don’t let people trying to score points against a political candidate try to conflate the two in your mind. They are not the same thing. We help our clients take advantage of legal strategies to minimize taxes and maximize spendable return.
If you want to pay more, please do. There’s a line on your individual tax return that allows you to pay extra to reduce the national debt. You may be better off investing that extra money – and Uncle Sam might be better off if you invest that money, too. After all, the IRS will tax you on the gains, over time, which could well be more than the amount you donate in the first place. But we want that to be your choice, and nobody else’s.