Question: Ralph, I am confused about all the talk in the press about Presidential Candidate Mitt Romney and his admission that he only pays an effective 15% tax rate. I seem to be paying more like 30% federal tax. What does he know that I don't know?
Answer: While I am not going to delve into the political aspects of this question, the tax question is very compelling. In this case, it appears the Mitt Romney has moved his income producing items away from normal compensation (i.e. W-2 income like most of us receive) and into what we call "passive" investments. These investments produce income in the form of interest, dividends, and capital gains which are taxed at a much lower rate. When someone has significant wealth and they are not in need of traditional "compensation" they can shift their income producing assets (investments) into these tax friendly areas. This is perfectly legal and is a great way to shield income from tax. It is not feasable during your working years for most of us because we have to work for compensation to earn wealth, but it's a great strategy once you have attained the wealth. We will see how this plays out in the political arena, but anyone with substantial personal wealth is no doubt taking advantage of this strategy.
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