Each of these tax planning steps would be recommended to Senator Obama by any competent tax advisor. While these opportunities are obviously available to anyone, only wealthy taxpayers have the funds necessary to implement such planning.
Tax savings – SEP: Federal tax savings in 2007 approximated $15,300. Assuming that Senator Obama’s book fees continue or he has other sources of income, by age seventy, with a six percent annual return, this retirement plan should have just short of $2 million of untaxed earnings and interest.
Tax Savings – College Funds: Federal tax savings in 2007 were none. Future tax savings will be significant. The $240,000 invested in these funds will create non-taxable income during the lives of the funds and annually and permanently save the Obamas about $6000 of Federal income taxes.
Tax Savings – Tax Exempt Income: Federal income tax saving in 2007 of approximately $15,000. The long term tax savings that could result from this strategy are very significant. If the amount stays at $45,000 of tax-free income, the annual savings will remain, at current tax rates, about $15,000 and through the Senator’s seventieth birthday, with reinvestment at the same tax-free rates, the Senator would have almost $2.8M with untaxed earnings of about $1.9M. --------- If he should continue the strategy with additional investment in tax-free securities, he could amass millions of dollars of income which would not be subject to Federal income tax.
Is the Senator’s tax and investment plan a good one? I think so.
Whether his tax plan to significantly reduce his Federal income taxes and maximize his family wealth comports with his stated political position to use the Internal Revenue Code to “spread the wealth”, I leave that to the reader.