A Deduction From Charity

[Parkbandit]

By Martin Feldstein
Wednesday, March 25, 2009; Page A15

President Obama's proposal to limit the tax deductibility of charitable contributions would effectively transfer more than $7 billion a year from the nation's charitable institutions to the federal government. But the high-income taxpayers affected by the rule change are likely to cut their charitable giving by as much as the increase in their tax bills, which would, ironically, leave their remaining income and personal consumption unchanged.

In effect, the change would be a tax on the charities, reducing their receipts by a dollar for every dollar of extra revenue the government collects. It is hard to imagine a rationale for taxing schools, hospitals, medical research budgets and arts organizations in this way. I suspect that the administration officials who drafted this proposal did not understand that it would have this perverse effect.

The proposed tax change would apply to married couples with incomes of more than $250,000 (and single people with incomes greater than $200,000). Under current law, such couples can deduct the value of their charitable gifts from their taxable income. While no one makes a charitable contribution to get a tax deduction, the deductibility of charitable gifts reduces the cost of giving and therefore increases the amount that individuals give.

Consider: A high-income person paying taxes at a 35 percent marginal rate lowers his tax bill by 35 cents for every dollar that he contributes to a charitable organization. The net cost to the individual is 65 cents for every dollar received by the charity. A substantial body of economic research shows that, on average, each 10 percent reduction in the cost of giving raises the amount that a person gives by about 10 percent. So, the 35 percent reduction implied by current deductibility rules raises the amount of charitable giving by about 35 percent.

The administration's plan would limit the amount that high-income individuals could deduct to 28 percent of their gifts, down from 35 percent, even though their incomes would still be taxed at a higher marginal rate. This raises the cost per dollar of giving from 65 cents to 72 cents, an increase of 10.8 percent that can be expected to reduce the total giving of these donors by about 10 percent.

What would this mean in practice? Suppose someone would give $10,000 to a university if that amount were deductible at 35 percent. That deduction would reduce the individual's tax bill by $3,500. Limiting the deduction to 28 percent would lower the individual's tax saving on a $10,000 gift to $2,800.

This is where things get interesting: If the 10 percent increase in the cost of giving caused the person to reduce his gift by 10 percent, to $9,000, his tax savings would be 28 percent of $9,000, or $2,520. The government's revenue loss would be reduced by $980 (from $3,500 to $2,520). The person's gift to the university would be reduced by $1,000, almost the same amount. Since this high-income person would pay $980 more in taxes but give away $1,000 less, he would end up with an extra $20 for personal consumption.

This is a hypothetical example, but the responsiveness of giving and tax revenue reflects the evidence regarding how people respond to changes in tax rates. The congressional Joint Committee on Taxation estimated that in 2007 the charitable deductions of those with incomes over $200,000 reduced government revenue by some $23 billion. If the 28 percent limit had been in effect that year, the $23 billion would have been cut by about $6.5 billion, and charitable giving would have been reduced by an approximately equal amount.

By 2011, the year in which the Obama administration proposes to start the new tax rule, the projected decrease in giving would surpass $7 billion. With the endowments of charitable institutions sharply reduced by the fall in stock prices, this loss of gifts would make an already bad situation worse.

Many tax features of the Obama budget should be changed to stimulate the near-term recovery of demand and to strengthen long-term incentives for productivity and growth. But the proposed tax on charitable gifts hits at the foundation of our pluralistic society. The administration should recognize its mistake and withdraw this proposal.

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/24/AR2009032402462.html


I laughed last night at Obama's reasoning.. that it was unfair a rich person would be able to take a 35% tax break where a middle American can only take a 25% one.

[Clove]

They ought to get rid of medical expense deduction over 7.5% of income too, because a rich person gets a bigger break!!!!

[ClydeR]

There is no reason why the tax break for charitable donations should be the same as the tax rate. I think the tax break for donations to churches should be 50%, and it should be around 35% for donations to other charities. It should not matter how much income the donor has.

The justification for a higher tax break for donations to churches is that the Constitution specifically forbids the government from interfering with the exercise of religion. Taxing amounts donated to churches, like the tax law does now, interferes with the exercise of religion.

[Suppa Hobbit Mage]

Yeah, last nights address had some scary shit in it. I don't like that he says people wouldn't be hurt by his redistribution of their wealth because they make enough.

I've been keeping an open mind on his policies and plans so far, and last night was really the first time I'm starting to agree with the folks who say he's a socialist.

[Jorddyn]

It's a stupidly written article. He's confusing tax rates and "percent deductible", and confusing tax credits and tax deductions.

And whoever came up with this idea is an idiot. It's clunky, hard to understand, difficult to manage, and really annoying.

IMHO, of course.

[Clove]

My coworker (who I secretly believe is ClydeR) thinks he's the Antichrist.

[Mabus]

There is no reason why the tax break for charitable donations should be the same as the tax rate. I think the tax break for donations to churches should be 50%, and it should be around 35% for donations to other charities. It should not matter how much income the donor has.

The justification for a higher tax break for donations to churches is that the Constitution specifically forbids the government from interfering with the exercise of religion. Taxing amounts donated to churches, like the tax law does now, interferes with the exercise of religion.

http://www.nolancompany.com/Main/Pictures/Photos-for-web-091603/Lg-PD-1-derail-flag.jpg

[Jorddyn]

Taxing amounts donated to churches, like the tax law does now, interferes with the exercise of religion.
Incorrect.

[Clove]

It's a stupidly written article. He's confusing tax rates and "percent deductible", and confusing tax credits and tax deductions.

And whoever came up with this idea is an idiot. It's clunky, hard to understand, difficult to manage, and really annoying.

IMHO, of course.The math is priceless.

[ClydeR]

It's a stupidly written article. He's confusing tax rates and "percent deductible", and confusing tax credits and tax deductions.

And whoever came up with this idea is an idiot. It's clunky, hard to understand, difficult to manage, and really annoying.

IMHO, of course.

If you change "But" to "because" in the second sentence of the article, then it makes a lot more sense. I bet some editor messed with the first paragraph.

[ClydeR]

I have another idea. Instead of reducing the tax benefit that a few people get from charitable donations, we should increase everybody's benefit to 35%. That way people in a lower tax bracket would have the same benefit from donating as people in high tax brackets.


And Jesus sat over against the treasury, and beheld how the people cast money into the treasury: and many that were rich cast in much. And there came a certain poor widow, and she threw in two mites, which make a farthing. And he called unto him his disciples, and saith unto them, Verily I say unto you, That this poor widow hath cast more in, than all they which have cast into the treasury: For all they did cast in of their abundance; but she of her want did cast in all that she had, even all her living. -Mark 12:41-44

[Clove]

Yeah, pretty much nobody in the country thinks like you do ClydeR. You jumped the shark in parodying a fundamentalist conservative months ago.

[Rocktar]

I've been keeping an open mind on his policies and plans so far, and last night was really the first time I'm starting to agree with the folks who say he's a socialist.

Uhhh, yeah, just one thing:

He called HIMSELF a Marxist/Socialist.

That should have been your first clue. DUHHHHHHHHHHH!

[Jorddyn]

Uhhh, yeah, just one thing:

He called HIMSELF a Marxist/Socialist.

That should have been your first clue. DUHHHHHHHHHHH!

Still waiting on the source for that.

[Rocktar]

Start reading lazy git.

[Jorddyn]

Start reading lazy git.

Disproving that someone said something is difficult if not impossible. Besides, you made the claim, you prove it.

So, as I said. Still waiting on the source.

[Clove]

Disproving that someone said something is difficult if not impossible. Besides, you made the claim, you prove it.

So, as I said. Still waiting on the source.Here, I'll make it easy for you Jorddyn. Obama never claimed he is a Marxist. Rocktar- prove us wrong.

[Jayvn]

What a way to screw the charitable orgs. ..granted I know people would use it to get out of some taxes..like saying the craptastic car they donated was worth a grand or two more on paper.. but still.. I would have rather seen the money go to something other than back to the man.

... oh and.. Obama 'didn't' say he wasn't marxist....

[Keller]

As counter-intuitive as it might seem, there are a handful of studies that "prove" the tax incentive is inconsequential in the decision to donate to charity.

Although I find it hard to believe that an individual previously making say $5M/yr at 35% w/ a deduction for charitable gifts wont decrease giving if (1) his income goes down to $4M, is taxed at 39% w/o a deduction for charitable gifts.

I just don't see how it wont have an impact. The guy is out $810k in after-tax earnings -- but he also donates dollar for dollar instead of 61 cents on the dollar.

[Clove]

I just don't see how it wont have an impact. The guy is out $810k in after-tax earnings -- but he also donates dollar for dollar instead of 61 cents on the dollar.Ding ding ding ding ding ding. This is why I thought his math was priceless.

[Parkbandit]

As counter-intuitive as it might seem, there are a handful of studies that "prove" the tax incentive is inconsequential in the decision to donate to charity.

Although I find it hard to believe that an individual previously making say $5M/yr at 35% w/ a deduction for charitable gifts wont decrease giving if (1) his income goes down to $4M, is taxed at 39% w/o a deduction for charitable gifts.

I just don't see how it wont have an impact. The guy is out $810k in after-tax earnings -- but he also donates dollar for dollar instead of 61 cents on the dollar.

At the end of the year, my accountant gives me a pretty solid number of what my charitable contributions should be based upon my income and tax burden. I'm pretty sure most people do the same.

Granted, I'm always over it due to the type of charitable giving we do, but I still know the number I should be at. I can imagine that many people come in right at that number at the end of the year.

I think maybe Obama simply doesn't understand how people donate to charity since he's relatively new at it. It's only been what.. 3-4 years of "real" donating from him. Maybe he's still trying to get used to it?

[Keller]

At the end of the year, my accountant gives me a pretty solid number of what my charitable contributions should be based upon my income and tax burden. I'm pretty sure most people do the same.

Granted, I'm always over it due to the type of charitable giving we do, but I still know the number I should be at. I can imagine that many people come in right at that number at the end of the year.

I think maybe Obama simply doesn't understand how people donate to charity since he's relatively new at it. It's only been what.. 3-4 years of "real" donating from him. Maybe he's still trying to get used to it?

I don't get it.

You don't make money by donating to charity, you just give with pre-tax dollars. Why would your accountant give you a target?

Maybe one of our resident accountants can inform me?

[Parkbandit]

I don't get it.

You don't make money by donating to charity, you just give with pre-tax dollars. Why would your accountant give you a target?

Maybe one of our resident accountants can inform me?

Because charitable donations aren't dollar for dollar.

We give clothing and other items to local charities. These items are of very little value to me as I am giving them away. If I didn't give them to charity, I would have to have a garage sale or simply throw them away.

When I give them to a charity, I get a receipt for those donations that I then use for tax purposes. I also give other things to charity that aren't dollar for dollar as well.. like services. While my labor is "free", I can include it for the service I rendered.

Add these types of charitable donations with real dollar for dollar ones and you have your total charitable donations for the year.

[Jorddyn]

While my labor is "free", I can include it for the service I rendered.

While I think it's fantastic that people volunteer and give labor, it is not a charitable deduction on taxes. Mileage and any other expenses can be included.

2. You cannot deduct the value of your time or services. Nor can you deduct the cost of raffles, bingo or other games of chance.
(http://www.irs.gov/newsroom/article/0,,id=106990,00.html)

The only true deduction you can take for more than cost is if you run a manufacturing business. Then you can deduct full market value of any inventory you donate.

[Jorddyn]

I don't get it.

You don't make money by donating to charity, you just give with pre-tax dollars. Why would your accountant give you a target?

Maybe one of our resident accountants can inform me?

A lot of people are very concerned with not owing taxes at year end (completely ignoring taxes paid in), and will make a charitable contribution to ensure they don't owe. Financially, they wind up behind where they would otherwise, but I'm all for giving, and it makes them happy, so why not?

[Khariz]

Yeah, last nights address had some scary shit in it. I don't like that he says people wouldn't be hurt by his redistribution of their wealth because they make enough.

I've been keeping an open mind on his policies and plans so far, and last night was really the first time I'm starting to agree with the folks who say he's a socialist.

:welcome:

[radamanthys]

Politically, this is a genius move.
Think about it! By taxing charity, nobody will give.
Then, SOMEONE's gonna have to take over the role that that charity was playing.
Who's gonna take over? I'll give you three guesses.

Basically, He's nationalizing charity. Brilliant for the socialist agenda.

So, Politically, this is a genius move. (Practically, he should be given a Habanero catheter.)

[Parkbandit]

While I think it's fantastic that people volunteer and give labor, it is not a charitable deduction on taxes. Mileage and any other expenses can be included.

2. You cannot deduct the value of your time or services. Nor can you deduct the cost of raffles, bingo or other games of chance.
(http://www.irs.gov/newsroom/article/0,,id=106990,00.html)

The only true deduction you can take for more than cost is if you run a manufacturing business. Then you can deduct full market value of any inventory you donate.

I wasn't referring to volunteering. I own 3 businesses and sometimes I give my services away to deserving people which is considered charitable giving since it has a substantiated value to it.

[Parkbandit]

A lot of people are very concerned with not owing taxes at year end (completely ignoring taxes paid in), and will make a charitable contribution to ensure they don't owe. Financially, they wind up behind where they would otherwise, but I'm all for giving, and it makes them happy, so why not?

I would much rather give my money to someone or something of my choosing than just handing it over to the government.

It's a wash for me in the end, but it's far more fulfilling.

[Clove]

I wasn't referring to volunteering. I own 3 businesses and sometimes I give my services away to deserving people which is considered charitable giving since it has a substantiated value to it.Sounds like some finesse going on. You cannot deduct time or services as a charitable contribution. What line are you reporting this on?

[Parkbandit]

Sounds like some finesse going on. You cannot deduct time or services as a charitable contribution. What line are you reporting this on?

Yea.. just looked it up.

Damn. Let's hope I'm not audited for 2006 or 2007. :(

I need to have a talk with my accountant.

[Clove]

Yea.. just looked it up.

Damn. Let's hope I'm not audited for 2006 or 2007. :(

I need to have a talk with my accountant.Don't worry too much, misreporting a deduction isn't fraud. But if it was a big deduction, paying the taxes could be costly.

[Parkbandit]

Don't worry too much, misreporting a deduction isn't fraud. But if it was a big deduction, paying the taxes could be costly.

I actually have documented charitable contributions for both time periods that can make up for most of what I claimed. Sucks for me for 2008 though.

[ClydeR]

I need to have a talk with my accountant.

If your accountant is telling you how much you should contribute to charity each year and allowing you to claim a deduction for personal services, then you need a new accountant.