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GreenTraderTax Blog
GreenTraderTax
How Buffett Saves Billions On His Tax Return

August 17, 2011

By Robert A. Green, CPA. Blog Notes About Politics From Robert Green.

Green's Forbes blog.

Warren Buffett brought his 2010 income tax return to his television interview with Charlie Rose this week. In my Nov. 24, 2010 blog “Dear Mr. Buffett: Put Up Or Shut Up On Taxes”, I asked Buffett to show his tax returns to the media, so the public could assess if Buffett significantly uses tax loopholes. We learned during the interview that he does.

In the YouTube video posted on my Forbes blog version - at the 31:21 time spot - Buffett casually mentioned to Rose that he uses the maximum 30% charitable contribution deduction each year – for appreciated property – and he has a $10 billion carryover of charitable contributions for subsequent use too. Just as I suspected in my prior blogs about Buffett using charitable tax deduction schemes.

Buffett told Rose his 2010 adjusted gross income was $62 million. He implied that most income came from long-term capital gains and qualifying dividends currently taxed up to 15%. Only a small portion of his gross income – a few million dollars for Buffett – is ordinary income, like wages and interest income, taxed at higher ordinary income tax rates currently up to 35%.

Buffett’s 30% charity tax deduction offsets his entire ordinary income, and next it offsets his lower long-term capital gains income. Hence, he pays approximately 15% long term capital gains tax rates only, and – as he likes to say – it’s a lower tax rate than others in his office pay.

Without that charitable tax deduction of appreciated shares wiping out his ordinary income, Buffett would pay the same tax rate as others on his wages and other ordinary income too. In that case, long-term capital gains preferential rates would only be the icing on the cake and not the whole cake.

I ran these numbers in our tax software and noticed that Buffett also avoids nasty alternative minimum taxes (AMT) of 28%. Charity is a powerful tax savings tool to avoid income, AMT and estate taxes.

The charity tax deduction seems to save Buffett around $3.3 million of federal income taxes each year. Plus, he saves state income taxes too. Nebraska’s is 7% and my software shows his tax savings from the charity deduction is around $1.3 million per year. That’s a total federal and state tax savings of approximately $4.6 million per year just from this charity deduction. That annual savings over 30 years equals $138 million.

Much bigger tax savings comes from the estate tax currently at 35%. Buffett’s approximate $10 billion-plus of charity times 35% equals more than $3.5 billion of one-time estate tax savings. Buffett promised to donate half his net worth to charity, currently estimated at 56 billion, so this savings could rise to 10 billion (28 billion estate tax deduction for charity, times 35% estate tax rate).

Buffett’s double-dip tax loophole of donating appreciated shares to charity also saves him 15% long-term capital gains taxes on the embedded capital gains in the shares he donates (as noted in my Aug. 16 blog “Mr. Buffett, the IRS needs your charity, too”). For discussion purposes, assume that appreciation is approximately $20 billion, and that would save him another $3 billion in income taxes. Total tax savings could be over $13 billion.

Buffett and Bill Gates asked other billionaires to sign their pledge to donate half their net worth to charity in similar fashion. Others are not as wealthy as Buffett, so figure 50 billionaires’ times $5 billion of tax savings equals $250 billion of taxes diverted from the IRS and states. That’s a meaningful amount of taxes and it should be considered for repeal in pending discussions for tax reform. That’s fair play and it doesn’t balance the books on the backs of the middle-class and “upper middle-class” making $250,000 per year.

Thank you to Buffett for modifying his latest tax plan to raise tax rates on the super-rich only, and not taxpayers making over $250,000 per year – which as he says is not rich in many cities. If President Obama insists on using Buffett as his tax-poster boy, then the President should discuss his substantial use of the charity tax deduction as well.

I was interviewed and quoted alongside Buffett by Andrew Ross Sorkin in his article “An Addition to the List of Tax Loopholes” published in the New York Times July 11. Mr. Buffett seems ready to throw the lower futures 60/40 tax rate (currently up to 23%) under the bus. It’s a tax break he doesn’t seem to use. I wonder if Buffett and Sorkin will add this billionaire charity scheme to their list of tax loopholes. Or would Buffett be willing to give up his lower long-term capital gains rate too?

Posted 2 years, 11 months ago on August 17, 2011
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