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How Does Mitt Romney Avoid Paying Higher Taxes?

How does Mitt Romney escape paying higher taxes?

We've been hearing a lot lately about how Mitt Romney, the Republican presidential candidate, only pays about 13% in federal income taxes.

Of course, we're in the midst of a political campaign so the accuracy of these allegations is the subject of intense debate. But let's take a look at his wealth planning to get a better picture on how (and if) he avoids paying higher taxes.

For starters, the Romneys give a considerable amount to charity. According to their 2010 tax return, the Romneys reduced their taxable income by giving $3 million to charity, reports Forbes.

Charitable deductions, whether made during one's life or through one's estate planning, can significantly reduce one's tax burden. During one's lifetime, they can reduce one's income tax burden. Upon death, they reduce the overall size of the taxable estate, reducing the amount of estate tax owed, or sometimes making the estate size fall under the taxable threshold.

So in short, the Romneys take a tax deduction on their charitable contributions.

While there is much discussion around Mitt Romney's minimal tax payments, the one thing to point out is that the discussion centers around his income taxes, as opposed to estate tax. So while the use of estate planning techniques are better served to reduce estate tax, there are some ways proper estate planning could help reduce income tax.

For one, assuming Mitt Romney owns income-producing property, placing that property in a trust for his kids would be one way to shift the income derived from those assets to other family members.

Of course, placing his assets in trusts is probably just one of the ways that Mitt Romney escapes paying income tax. There are rumors of offshore accounts and of course, the fact that a large part of his income is taxed as capital gains as opposed to ordinary income.

But as Mitt Romney says, the tax code is complicated and discussing how, exactly, Mitt Romney minimizes his tax is a discussion best left to very crafty tax planners.

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