The presumptive Republican presidential nominee's refusal to disclose more than his most recent two years of tax returns has spawned wide-ranging and sometimes far-fetched speculation from water coolers to talk shows. But a few tax experts are zeroing in on an esoteric corner of the tax code and pointing to some intriguing clues buried in the returns Mr. Romney has already revealed.
Mr. Romney has insisted that his returns from 2010, and preliminary returns for 2011 (until he provides a final version) are enough for voters to evaluate his fitness for office. But even though he has not released his returns from earlier years, the 2010 return sheds some light on those years.
That's because Mr. Romney paid income tax to foreign countries, and as result claimed in 2010 a $129,697 foreign tax credit, which he used to offset taxes he owed in the United States. American taxpayers who claim the foreign tax credit are required to report their total foreign taxes paid and tax credits used for the previous 10 years. So that return contains foreign tax data going back to 2000.
The good news for Mr. Romney is the forms suggest that he paid at least some federal income tax every year, as he has said he did. He used the foreign tax credit every year to offset his taxes in the United States, and American taxpayers can't use a tax credit if they owe no federal income tax. This casts even more doubt on the claim by the Senate majority leader, Harry Reid, attributed to an unnamed Bain Capital source, that Mr. Romney paid no income taxes during that time.
But the data does suggest that Mr. Romney was able to reduce his taxable income in 2009 to a very low level, and thus might have paid relatively little tax — even if it did, as Mr. Romney claims, amount to at least 13 percent of his taxable income. Tax experts also said it is theoretically possible, though highly unlikely, that he paid no federal income tax in 2009. At the same time, an unusually high foreign tax credit in 2008 raises questions about the size and source of Mr. Romney's foreign income that year and how it was treated for tax purposes.
There's nothing to suggest that Mr. Romney did anything wrong. He has said he has paid what he owed but not one dollar more. The Romney campaign has said that Mr. Romney's foreign income came through a blind trust established in 2003, when he became governor of Massachusetts. Thus, he didn't oversee the foreign investments that produced the income and tax credits.
But a relatively low taxable income in a year like 2009, as well as the large foreign tax credit in 2008, raise questions that he might prefer to avoid. They also shed light on tax avoidance tactics commonly used by the ultrawealthy but out of reach for the average taxpayer.
Foreign tax credits are highly prized because they reduce tax liability on a dollar-for-dollar basis. Every dollar of credit is a dollar in tax saved, unlike deductions, which reduce only taxable income. Most American taxpayers don't have foreign bank accounts or partnerships in the Cayman Islands, but many get a foreign tax credit because they own mutual funds that invest on foreign exchanges. Foreign taxes paid by the funds are passed on to shareholders in the form of tax credits. The rationale is that people shouldn't be taxed more than once on the same income.
That may sound simple, but the tax code is anything but. Over the years, wealthy taxpayers have found countless ways to game the system, and every time the Internal Revenue Service has moved to plug a loophole, the code has become more complicated. "The U.S. tax laws for foreign income are a horrible mess," Daniel Shaviro, professor of taxation at New York University School of Law, told me this week. "It's insanely complex."
I discovered that firsthand over the last few weeks as I talked to accountants and struggled to make sense of those portions of Mr. Romney's return. Besides the credit itself, his return includes no fewer than four versions of I.R.S. Form 1116, used to calculate the foreign tax credit, as well as related worksheets, which contain the information from the previous 10 years.
I even took the online course offered by the I.R.S. to try to understand the complex calculations. Although I passed several quizzes, I still needed the assistance of James R. Hines Jr., a professor of international taxation at the University of Michigan Law School.
Mr. Romney's return shows how wealthy Americans with foreign earnings can sharply reduce their tax liability in the United States. In 2010 Mr. Romney reported $2.73 million of gross foreign income. On that amount, he paid foreign taxes of $67,173, or just 2.5 percent of his gross foreign income.
After all his deductions (including the kind of noncash charges that are central to all tax shelters, like depreciation) that multimillion-dollar sum declines to just $392,000 in taxable income. This amount appears on his federal tax return, but at his 13.9 percent effective rate, the federal tax on that income — $54,627 — was more than offset by a $129,697 tax credit for foreign taxes he paid in 2010 and earlier years.
The I.R.S. has struggled for years to cap the foreign tax credit at the amount an American would have paid in tax on that same income in the United States, so as not to subsidize higher-tax foreign governments, but with limited success. One of the basic problems with the foreign tax credit, Professor Shaviro observed, is "it's overgenerous."
Mr. Romney's foreign tax credit was so high in 2010 in part because the tax code allows American taxpayers to use credits from previous years. Mr. Romney had an unused foreign tax credit from 2009 that he carried over to 2010, when he was able to use most of it (the rest was carried over to 2011). The year 2009 was the first time in 10 years that Mr. Romney didn't use the full amount of his foreign tax credit to offset his taxes in the United States, which means that his foreign losses that year more than offset his gains, producing a net loss. American taxpayers can't use a foreign tax credit if they don't report foreign income on their tax return.
Since Mr. Romney didn't use all the foreign tax credit available to him in 2009, tax experts said he must have reduced the tax owed on his foreign income to zero. In the highly unlikely event he also reduced his taxable income from United States sources to zero, or even showed a loss, he would have owed no federal income tax in 2009.
That's not the only evidence that Mr. Romney's income in 2009 was substantially lower than in 2010. He was able to use substantial losses from previous years to reduce his 2010 capital gains, indicating that he had no net capital gain in 2009. Capital gains accounted for most of Mr. Romney's income in 2010 — $12.6 million of his $21.6 million total. In addition, he reported more than $800,000 in taxable refunds from 2009, which seems very high. If he had smaller refunds, lower speaking and director's fees, and lower business income or even a business loss, his adjusted gross income for 2009 could have been quite low, at least by Mr. Romney's standards. Assuming he had similar itemized deductions to the $4.5 million he had in 2010, his taxable income could have been extremely low."
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