Did Tim Geithner Help Rick Santorum With His Returns ?

Talk about a busman’s holiday.  I decided to work half a day today, leaving at 5:30 PM, so I could have dinner with my daughter.  So here I am at home at 8:00 PM instead of the office and the task I have assigned myself is reviewing Rick Santorum’s returns.  I studied Newt’s and Mitt’s when they came out and have written a bit aboutNewt’s.  I didn’t even notice when Rick’s came out, but since he just won two primaries, maybe I should take a look.  Santorum released returns for 2007, 2008,2009 and 2010.

If I remember correctly Newt used a relatively small firm in the Washington area that has a pretty low profile and Mitt used PWC (You know the guys who hand out the Academy Awards).  So who prepared Rick Santorum’s return ? The envelope please – He did (or maybe his wife).  The return is “self-prepared”.  If we ever want to have real tax simplification all of congress and the executive branch above a certain level should be required to prepare their own returns and be automatically selected for audit every year.  So maybe Rick will start getting us there if he is elected.

I noted three possibilities.  On the 2008 – 2010 returns Mrs. Santorum has her profession listed as “housewife”.  In 2007 though her profession is listed as “author”.  If she had income, you would expect a Schedule C for her in 2007.  There is none.  On Schedule E, which reports several rental properties (more on those later), there is one columne that shows “royalties” of $4,954.  That is not where author’s royalties go.  That is where the royalties on your oil wells and the like go.  I’ve caught that mistake numerous times.  If Rick or his wife made that mistake, then they underpaid self-employment tax just like Tim Geithner, only not by as much.  It is unlikely that this was deliberate as Rick is paying quite a bit more in self-employment tax than he needs to.  He runs his consulting business as a sole proprietorship paying self-employment tax on the whole profit.  If it, instead, were an S Corporation, he would just have to pay fica/medicare on a reasonable salary.  That’s what Newt does.  Newt drew criticism for that, but I stood up for him.

 The home mortgage deduction was $68,821 in 2007, $77,250 in 2008, $84,943 in 2009 and $43,943 in 2010.  Your home mortgage interest deduction is limited to interest on $1,100,000.  If you have a larger mortgage than $1,100,000 that went into acquiring your home, part of the interest is non-deductible.  When I see interest significantly higher than $55,000, I suspect that the rule on the limitation has been overlooked.  Doing it correctly requires you to make some computations rather than just putting down the number that the bank sends you.  Of course, it is possible that the Santorums had a high interest rate and finally got around to refinancing in 2010.  My money is on there being an error there, but I’m just a tax blogger not an investigative reporter.

The final possible Geithner move is more subtle.  The Santorums have six rental condominiums.  The interest expense on them is spread equally, which makes me think there is one mortgage covering all six of them.  They must have had them for a long time since they seem to be fully depreciated.  There are small amounts of depreciation which seem to relate to appliances.  The interest expense rose pretty significantly over the four years though.  If the increase comes from borrowing against the properties for other purposes it should not have been deducted against the properties.  Interest expense is deductible or not, based on how the borrowed money is spent, not on what  property secures it.

When I surveyed the commentary on the returns, I did not notice much on the details.  There was the observation that Rick makes a lot more money than most working stiffs, but a lot less than Mitt Romney.  Further he pays a higher rate than Romney.  There was criticism for him not being charitable enough and comments that his charity was unremarkable in its amount.  In 2010 he made over $900,000 and had charitable contributions a little over $16,000.  I find that unremarkable.  As I would expect, my blogopshere buddy Joe Kristan , who has guest posted here, caught the mortgage interest issue and noted that Rick could have saved self employment tax by incorporating.  He also noted that he was not taking advantage of the opportunity to defer the income tax on some of his earnings with a SEP or a Keogh.  Joe wrote:

Based on his schedule Cs, he could have started a SEP retirement plan and sheltered up to $45,000 in 2007, 46,000 in 2008, and $49,000 in 2009 and 2010. At a 35% marginal rate, that would have saved him $66,500 off his federal tax bills. With seven kids, he could use it. Based on his minimal interest and dividend income, he’s not saving much in taxable accounts.

The problem might be the seven kids.  In order to save the 35%, you have to put 100% into the SEP.  Tony Nitti also noticed the mortgage interest problem.

It was Santorum’s recent victories, that made me want to look at his returns.  I went through the returns, before I looked at the commentary and would have passed on it, if others had been all over what I had noticed.   Clearly Santorum is not trying very hard to lower his tax bill.   It looks like there is a good chance, that there are a couple of errors.  He may have underpaid by a few thousand dollars, particularly if he blew the mortgage interest deduction.  The possible tax understatement is not enough to merit an accuracy penalty.  Still, it is an issue that is obvious to a return preparer and you have to wonder why someone who wants to be the chief executive of the nation would not bother to consult one.

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