The Clintons earned $10,168,272 of self-employment income in 2015 from book royalties, speaking engagements and consulting, resulting in the payment of $301,698 in self-employment tax. As self-employed taxpayers, the Clintons pay both the employer and employee share of Social Security and Medicare tax, at rates of 12.4 and 2.9 percent, respectively. A 0.9 percent additional Medicare tax applies to earned income over $250,000 for taxpayers married filing jointly. Although not disclosed on the publicly released return, we can infer the additional Medicare tax of $82,264 based on the available details.
The Clintons could consider conducting their business activity through an S corporation rather than personally. Profits earned from an S corporation are taxed as ordinary income but wouldn’t be subject to self-employment taxes. As shareholder-employees of their respective corporations, both of whom are providing significant services, the corporations would need to pay reasonable salaries. If they each paid themselves a salary of $500,000 from their S corporation and took the remainder of their earnings as corporate profits, they would save over $348,000 of Medicare and additional Medicare tax. However, the media pilloried previous political candidates, such as John Edwards and Newt Gingrich, for the same strategy. Understandably, Mrs. Clinton may not want the same media attention, Internal Revenue Service scrutiny or the cost of additional corporate tax returns.
Retirement Plan Contributions
Although reporting a high level of self-employment income, the disclosed tax return shows no deduction for self-employed retirement plans. The Clintons could establish and fund a retirement plan based on their self-employment earnings and generate a current income tax deduction as well as benefit from tax-deferred growth. For example, the Clintons could have contributed $53,000 each to a simplified employee pension individual retirement arrangement (SEP-IRA) for 2015, resulting in a $106,000 deduction and saving roughly $43,000 in federal income tax. Alternatively, and given that both of the Clintons are over age 50, establishing individual 401(k) plans would allow for catch-up contributions of $6,000 each in addition to employee and employer contributions of $106,000. Other retirement plan options in lieu of the SEP-IRA or 401(k), such as a cash balance pension plan, could provide an even greater tax benefit. It should be noted that both of the Clintons are close to age 70 ½, at which point they would need to begin taking required minimum distributions from their retirement accounts and paying tax on the distributions at ordinary rates, but the initial deferral and subsequent tax-deferred growth of these plans provide immense benefit.
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David R. Duringer, JD, LL.M, is a concealed firearm instructor and tax lawyer specializing in business and estate planning; licensed to practice law in the states of California and Washington. He is managing shareholder at Protective Law Corporation, serving Southern California from its Laguna Hills (Orange County) headquarters and satellite offices in San Diego County (Coronado and Carlsbad).
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