Financial Planning Magazine recently ran an article titled Fixing the Obamas' Finances by Allan S. Roth. The article is based on an analysis of the first couple's 2012 tax returns and their 2011 financial disclosure report.
According to filings, the Obamas earned $662,076 in 2012 and had taxable income of $335,026 after deductions and exemptions and paid $112,214 in federal taxes - about 18.4% of their adjusted gross income or AGI, a term of which I am sure many of you still remember after your April 15 filing.
Digging deeper, the Obamas apparently can reduce their taxes significantly through obvious changes, through what the article calls "low hanging fruit" to earn much more with little added risk.
For starters, the Obamas apparently pay $45,046 in mortgage interest on an $800,000 mortgage loan. This works out to an interest rate of about 5.625%. In addition, they have $3 million tied up in Treasury notes that yield about 0.7%. So fix #1 suggests the Obamas could easily use cash tied up in Treasuries to pay off a fairly expensive mortgage and gain about $40,000 that currently goes in interest payments each year -is quite a savings, would you agree? In addition, by taking $800,000 out of their Treasury investments, they are reducing interest rate risk on Treasuries should rates rise. Of course, this move would relieve them of the tax deduction on mortgage interest and cause them to pay slightly more in taxes but the net effect would still be more money in their pockets even after paying higher taxes.
The Obamas also have a tax-loss carryforward of $115,516 that's reported on their Schedule D (likely from significant losses on past investments where they bought high and sold low). Now while this carryforward can be used to offset future taxes, the amount usable is restricted to $3,000 at which rate, would take them 40 years to use up the loss carryforward. Alternately, the Obamas could change their asset allocation to create more opportunity for taxable capital gains by moving their money from Treasurys to perhaps equities, mutual funds or index funds, and in doing so, directly offset capital gains against this carryforward without limits. And in so doing, they would lower their tax on the capital gains while also improving investment income.
And while the Obamas do have $400,000 in stock index funds, the $3 million in Treasuries appears overly conservative especially since the President is guaranteed a fairly hefty life-long pension. Fix #2 would suggest they can up the risk quotient a little and jump into equities a bit more.
Now, there is only so much one can glean from public tax disclosures so it's hard to say what else the Obamas could do to better manage their wealth but on the face of it, it seems like this savvy couple is being less-than-savvy about managing their finances... but he is the President and she is the First Lady and they have a guaranteed pension so I know financial planning is likely not front and center on their minds... so let's give them a break on this front.
But the real point of this discussion is if the President's so obviously missing some key points that can save him loads of money, chances are good that you are too so talk to a qualified financial advisor and see how you can better manage your taxes.