How Mitt Romney gets away with paying about 13% in taxes

Most, if not all, of Mitt Romney’s income is derived from long-term capital gains and qualified dividends both of which are taxed at a maximum rate of 15% (see below for details). Additionally, Mr. Romney uses substantial itemized deductions to lower his overall income further reducing his overall tax rate.

It is likely these favorable tax rates on long-term capital gains and qualified dividends will expire this year and not be renewed… but stay tuned to see what the new Congress does in January 2013.

Tax Rate on Long-Term Capital Gains

Capital gain income from assets held longer than one year are generally taxed at a special long-term capital gains rate. The rate that applies depends on which ordinary income tax bracket you fall under.

  • Zero percent rate if your total income (including capital gain income) places you in the ten or fifteen percent tax brackets.
  • 15% rate if your total income (including capital gain income) places you in the twenty-five percent tax bracket or higher.

Tax Rate on Dividend Income

Dividends are classified either as ordinary dividends or as qualified dividends. Ordinary dividends are taxed at your ordinary tax rates for whatever tax bracket you are in. Qualified dividends are taxed at a 15% percent rate. To be eligible as a qualified dividend, the dividends must be from a domestic corporation or a qualifying foreign corporation and you must hold the stock “for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.” (Publication 550.)

Source: http://taxes.about.com/od/capitalgains/a/CapitalGainsTax_4.htm

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