The Mysteries in Mitt Romney's Tax Return

The multimillionaire candidate ended up with much lower income for 2011--and paid lower taxes--than expected.

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Republican presidential candidate and former Massachusetts Gov. Mitt Romney addresses the U.S. Hispanic Chamber of Commerce in Los Angeles, Monday, Sept. 17, 2012.

Mitt Romney apparently adopted a new tax strategy at some point this year.

The Republican presidential nominee has completed and released his official 2011 tax return, and his tax bill is lower than estimated on a preliminary return released eight months ago.

[See a collection of political cartoons on Mitt Romney.]

Here's how the numbers on Romney's final return compare with the numbers from his preliminary return, and from 2010:

Final 2011 return:

Adjusted gross income: $13,696,961

Total federal tax paid: $1,935,708

Effective federal tax rate: 14.1 percent

Preliminary 2011 return (released in January):

Adjusted gross income: $20,901,075

Total federal tax paid: $3,226,623

Effective rate: 15.4 percent

Final 2010 return:

Adjusted gross income: $21,646,507

Total tax paid: $3,009,766

Effective rate: 13.9 percent

So here's the mystery: Between January and October of this year, Romney's adjusted gross income for 2011 fell by $7.2 million. And it dropped by nearly $8 million compared with his AGI in 2010. His federal tax liability also fell, by similar proportions.

[See why Romney was half right about people who don't pay taxes.]

The most likely explanation is that Romney's accountants transferred income from Romney's personal return to one of the three trusts that also generate considerable income, almost all of it from investments. It will take a detailed examination of the 2010 and 2011 documents to figure out what changed, but here's a clue: Romney's campaign has begun to focus on the "personal" tax rate paid by Romney, rather than the tax rate that might be associated with the trusts and his total income from all sources.

This matters because Romney is subject to a very low tax rate as it is, since most of his earnings come from investments, which are taxed at a lower rate than wages. Romney hasn't released tax documents prior to 2010, but some tax experts think his overall tax rate could have been very close to zero during at least a couple of years, possibly because of capital losses suffered during the stock-market wipeout of 2008, which zeroed out earnings for many investors.

[See a collection of political cartoons on the 2012 campaign.]

The Romney campaign now says that since 1990, "the lowest annual effective federal personal tax rate" Romney paid was 13.66 percent. In other words, the rate on what might be characterized as his personal income never fell below that threshold.

But that doesn't account for the three trusts, or other investment vehicles that may have existed prior to 2010. And it's unusual to limit the claim to "personal" taxes when Romney has acknowledged other types of income. So it's possible that the effective tax rate on the trusts was very low at some point—and maybe even zero, which would have indicated a net loss for the year.

Romney's personal return for 2011 shows significantly less investment income than his 2010 return. In 2011, for instance, Romney claimed $6.8 million in capital gains, down from $12.6 million in 2010. That alone helps explain why Romney's overall income and tax bill dropped. The stock market was flat in 2011, but other investment classes, such as bonds, did much better, so it's unlikely Romney lost money on his investments in 2011.

[See why Romney was half right about people who don't pay taxes]

There's not necessarily anything unethical about Romney's tax strategy. Former IRS commissioner Fred Goldberg, a Romney supporter, issued a statement on Romney's behalf saying there's nothing in Romney's 2011 return that suggests unusual or evasive tactics. Romney is also a generous sponsor of charities, with more than $4 million in donations last year. That helps lower his tax bill significantly.

In a short email response to questions about the disparities on Romney's returns, the Romney campaign said only that "the Romneys' income can vary significantly from year to year, depending primarily on what investments are sold and how much they have appreciated or depreciated." The campaign also told several news outlets that Romney claimed fewer charitable deductions than allowed in 2011—basically leaving money on the table--in order to keep his personal tax rate above 13 percent. That's the minimum level Romney has consistently claimed that he pays. Still, he could claim the left-over amount as a deduction in future years.

Romney would dearly love to bury questions about his wealth and the taxes he pays, but the latest release may not accomplish that. The changes on his return between January and now raise fresh questions about Romney's complex tax strategy, and the new claims about the "personal" tax rate he has paid over the years suggest there's something else he's not revealing. Nobody likes taxes, but Mitt Romney has a more peculiar tax burden than most.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.