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FREE TAX ADVICE, AND WORTH EVERY PENNY

October 18, 2004

As we've noted before, one of the perks of running for president is free tax advice. As far as we know, Senator Kerry's spouse is the first candidate's wife who has filed "married filing separately." She released the separate return last friday - the last extended due date available for her return.

Unfortunately for nosy free advice-givers, she only released the first two pages of her 2003 federal return, and none of her state return. Still, we can make observations and tentative suggestions based on the limited release. We warn: don't act on our free advce without consulting your paid tax advisor (our rates are available on request).

BIG ALTERNATIVE MINIMUM TAX - ADJUST YOUR MUNI PORTFOLIO

Ms. Heinz (the return is in the name of "Theresa Heinz") reports tax-exempt interest of $2,781,791 for 2003. She also reports alternative minimum tax (AMT) of $326,451. Her AMT is more than half of her tax bill.

AMT is computed alongside your regular income tax bill. It is computed on a broader base (more items are taxable, and fewer deductions are allowed), and at a lower rate (28% maximum).

If you are paying taxes at the 28% AMT rate, the tax savings from holding municipal interest may not compensate for their inferior gross yield. Many AMT taxpayers can improve their after-tax yields by selling their muni bonds and buying taxable corporate bonds.

TOO MANY PRIVATE ACTIVITY MUNI BONDS?

Some "tax-exempt" municipal bonds aren't really very tax-exempt. Ms. Heinz appears to own a lot of them. We refer here to "private activity bonds," which, while exempt for regular income tax, are fully taxable for AMT. Private activity bonds are muni-bonds issued for private purposes, like to build a sports stadium for a baseball team.

Based on the amount of minimum tax Ms. Heinz pays on her return, we estimate that she has over $1,000,000 in private-activity bond interest. It's very likely that she could boost her after-tax yield by dumping these non-exempt exempt bonds and moving into a good corporate bond fund.

DIVIDENDS - A GOOD THING

While Ms. Heinz may not care much for President Bush, she certainly benefits from his 15% top tax rate on dividends. We compute that the 15% dividend rate reduced her federal tax bill by about $290,000.

MASSACHUSETTS - BETTER FOR VACATION HOMES THAN TAX HOMES

The address on Ms. Heinz's 2003 return is crossed out. According to The New York Times, the Kerry Campaign says the wife of the Massachusetts Senator is a Pennsylvania resident for tax purposes. From a tax-planner's point of view, that's a shrewd move. We estimate her Pennsylvania taxes for 2003 at about $142,000. On the same income, her taxes as a Massachusetts resident would have been about $388,000.

BACKUP WITHHOLDING?

Ms. Heinz reports federal taxes withheld of $2,230. This probably is the result of "backup withholding," which occurs when an interest or dividend payor has no social security number or an incorrect number for the payee. Get those folks the correct social security number - no need to let the IRS have that much money ahead of time, ma'am!

RETIREMENT PLAN CONTRIBUTION

Ms. Heinz reports "self-employment tax" of $1,251. This means she has self-employment income of $8,183. This made her eligible for a self-employed retirement plan contribution of $1,521, but for unknown reasons she bypassed this tax-deferred savings opportunity.

According to her return, Ms. Heinz is at least 65 years old. Since she's not adding to her retirement plan, we hope she has a little something put away for her golden years...

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