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Your Money: Are the Bush-era tax cuts good for all Americans, or just investors?

Your Money: Republican presidential candidate Mitt Romney benefited from the tax cuts. But he's not alone.

Republican presidential candidate, former Massachusetts Gov. Mitt Romney campaigns at Ring Power Lift Trucks in Jacksonville, Fla., Monday, Jan. 30, 2012. (AP Photo/Charles Dharapak)
Republican presidential candidate, former Massachusetts Gov. Mitt Romney campaigns at Ring Power Lift Trucks in Jacksonville, Fla., Monday, Jan. 30, 2012. (AP Photo/Charles Dharapak)Read moreAP

Mitt Romney, if elected President, vows to keep the Bush-era tax cuts. And he wants to layer in a bigger corporate tax break - in a bid to jumpstart the economy.

More than any other presidential candidate, Romney also has benefited handsomely from these cuts - the lower capital gains and dividends taxes - and he will likely do so again if they are maintained.

So are these tax cuts good or bad for the rest of us? Good, if you're an investor. In fact, all investors should be aware of the Bush tax cuts' implications, described below.

Without another extension, the low rates that former President George W. Bush signed into law will skyrocket at the end of this year as scheduled, says Bill Smith, managing director in CBIZ MHM national tax office in Bethesda, Md. "Does this create a conflict of interest for Romney? Absolutely," says Smith, because they benefit Romney enormously.

First, Romney paid a 14 percent effective overall tax rate, much lower than many middle class folks pay. One reason is the Bush tax breaks for capital gains.

Generally speaking, investment gains are taxed at 15 percent. Bush argued the low rates would help encourage saving and investment. If the Bush tax cuts expire at the end of 2012, that 15 percent tax rate would rise to the ordinary income rate of 39 percent. Long-term capital gains taxes would rise from 15 percent to 20 percent.

The tax code's treatment of income from partnerships in private equity, hedge funds and real estate development means that some of the country's wealthiest people are taxed at a lower rate than bus drivers and nurses. Romney is among the top earners - because the bulk of his taxable income came from investments, not from a salary.

Romney's compensation from Bain Partners, his private equity firm, was lavish: Tax filings released by his campaign show Romney received more than $20 million a year in 2010 and 2011, mostly via investment income.

If the Bush tax cuts weren't in effect for 2010 and 2011, Romney would have paid another $2.5 million in taxes, according to Smith's analysis (see chart).

Charity tax savings

Another way the Romneys saved on taxes was by donating more than 16 percent of their income to charity. Of the $7 million Romney and his wife, Ann, gave to charity one year, for example, $4.1 million went to The Church of Jesus Christ of Latter-day Saints. That was in addition to millions of dollars the couple has given through a family charity to faith-based Brigham Young University, according to the Salt Lake Tribune newspaper.

The rest of us benefit from this, too. Under current law, taxpayers can offset up to 50 percent of their income tax by contributing to charity.

The Buffett Rule

The final reason Romney pays such a low percentage is because the bulk of his income comes from "carried interest" in private equity funds. In September, the Obama administration proposed raising $18 billion over the next decade by taxing carried interest at the higher ordinary income rates. In 2007 a Democratic bid to scrap the special carried interest rate failed in the Senate amid lobbying by private equity, hedge fund, and real estate magnates. Even Eric Cantor, a Virginia Republican, is willing to see the carried interest tax break eliminated.

Romney and billionaire businessman Warren Buffett are in the same boat, tax-wise. In 2010, Buffett reported a total take-home pay of $62 million; but he paid himself a salary of just $100,000 a year. Like Romney, most of Buffett's income came from investments - long-term capital gains and dividends - taxed at the special Bush tax cut rate of 15 percent.

Buffett decried this inequity in tax rates in a public letter and noted that he and the other 400 wealthiest Americans are paying a lower rate (about 18 percent) than they were just two decades ago (about 26 percent in 1992).

The Bush tax cuts have benefited many Americans, particularly those baby boomers who are cashing out their retirement accounts from the stock and bond markets, and paying taxes on those capital gains and dividends.

"I'm not saying there's anything wrong with [the Bush tax cuts]; I'm in favor of them," says CBIZ's Smith. "We all benefit from them. But with Romney, he's certainly benefited tremendously. I could live comfortably [just] off his tax savings."

For the rest of us who are not billionaires, it's unlikely the Bush tax cuts or any significant tax rules will be changed until after the fall elections, said Mel Schwarz, partner at Grant Thornton.

So who benefits in the meantime? All Americans who invest, including the 53 percent of private sector U.S. workers with employer-based retirement plans.

For as long as the market-related Bush tax cuts survive - the 15 percent capital gains and dividend taxes - investors have an incentive to tilt their portfolios towards high-dividend-yielding stocks and other income-generating investments. Max out your employer contribution to your retirement account if you have one, and put the cash to work. You'll pay less to the tax man.