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President Barack Obama and his wife, Michelle, paid the lowest effective tax rate since they moved into the White House by taking advantage of the most popular — and expensive — benefits in the tax code.
Tax returns released by the White House on Friday show that the Obamas paid an effective tax rate of 18.4 percent on more than $608,000 in adjusted gross income earned in 2012. Last year, their rate was 20.5 percent.
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They were able to lower the amount of income on which they were taxed by more than $258,000 by claiming several big-ticket deductions.
The first family’s biggest deduction by far stems from the $150,034 in donations they made to 33 charities, including the Fisher House Foundation, a charity that helps the families of wounded veterans, and the Sidwell Friends School, where the president’s daughters attend school.
The Obamas’ return serves as an interesting test case for how some of the proposals outlined in the White House budget released this week would raise taxes on high earners.
For instance, the budget calls on lawmakers to impose a 28 percent cap on deductions for taxpayers that fall into the top tax brackets.
For the Obamas, the charitable contributions alone — which account for almost a quarter of their income — would nudge them up against the 28 percent cap. They wouldn’t be able to write off almost any of their mortgage interest or state and local taxes — adding more than $100,000 back to their taxable income.
The return released Friday showed the Obamas wrote off more than $63,000 in Illinois state and local taxes and more than $45,000 in mortgage interest paid on their Chicago home.
The Obamas wouldn't be subject to the budget proposal’s Buffett Rule — which imposes a minimum 30 percent tax rate on top earners — because their income is less than $1 million.
The Obamas were hit particularly hard by the complex alternative minimum tax, which was designed to make sure the wealthy can’t use deductions to reduce their tax bill by too much. It accounted for about $21,000 of the family’s total tax bill.
Obama’s budget doesn’t propose any changes to the AMT, but an overhaul of the tax would likely be part of any tax reform effort that advances this Congress.
During last year’s campaign, Democrats highlighted the 14.1 percent rate tax rate Mitt Romney paid on more $13.7 million in income as evidence that the tax code favors the rich.
While the president’s tax rate is edging closer to what his presidential rival paid, it remains higher, in part, because Romney was able to take advantage of tax breaks that focus on investments, which made up most of his income.
This article first appeared on POLITICO Pro at 4:55 p.m. on April 12, 2013.
