White House Rethinks Tax Hikes

[rockouthippie]

WASHINGTON -- President Barack Obama is meeting strong Democratic Party resistance to his proposal to reduce tax deductions enjoyed by upper-income Americans and could be forced to drop or modify the idea.

http://www.google.com/hostednews/ap/...GapNQD96O26R80

[baafie]

Don't bite the hand that feeds you. And especially don't bite the hand that pays for your political campaign and your vacation trips.

[swingdjted]

Donors save a lot more than what was cited in the article. The gifts are used to bring a person out of a higher tax bracket and into a lower tax bracket. In this sense, the donation is often a net profit transaction for the donor and also takes a large amount of tax dollars away from the federal government.

This proposal will make it so that donors will have to donate more to switch brackets, and if they don't, they'll have to let it go to taxes, the way they would have before if not donating. Nonprofits have the option to seek government money grants to stay alive if they have good workers. I was once the program director at the Boys & Girls Clubs of America, and when we stopped getting enough money from donations, I wrote grants through WIA (Workforce Investment Act), which is a federally funded program. This was good for two reasons: First, the money was more reliable and consistent, not a ton at once and none at another time, but more importantly, second, WIA's terms and conditions/oversight of the grant helped our program become much more organized/effective and better for our kids (mandated evaluation/assessment/proof of progress), even though the overall operating budget remained the same from the time of donations to the time of WIA money.

If people want to give, the tax deduction shouldn't be the motivating factor, and if it is, it leads us to ask if they're really giving or getting a net gain by giving.

[rockouthippie]

I don't see how anyone would come up with a net gain by donating to charities. Perhaps they just like some of the money to go somewhere to do some *good* instead of into government coffers.

(mandated evaluation/assessment/proof of progress)

Did they all become proper little atheistic, humanistic communists as planned? Can't read or write or think for themselves, but good enough to clamor for the government teat and vote Obama eh?

[swingdjted]

No, they were pulled out of juvenile hall, given intensive intervention, then if found ready, sent to work at tire and soap plants while finishing their high school diplomas, something the program was incapable of before the transition.

Workforce Investment Act is a very effective program funding source, although difficult to get money from because of the oversight.

On the topic of the net gain:

If someone donates a carefully selected amount of money (the amount necessary to drop to a lower tax bracket), the money saved by paying a lower percentage of total income on taxes (due to the lower bracket) is often a bigger amount than the amount donated. It's hard to explain in a short paragraph, but basically it can often cost less to donate than to stay in the higher tax bracket. I have family members that enjoy this little perk of good tax planning; it's quite common.

[rockouthippie]

Originally posted by swingdjted
If someone donates a carefully selected amount of money (the amount necessary to drop to a lower tax bracket), the money saved by paying a lower percentage of total income on taxes (due to the lower bracket) is often a bigger amount than the amount donated.

I have seen it lower the tax bracket of donors. I have not seen it work out as a net gain. Rarely, it works out to be break-even.

[swingdjted]

It depends on how close you are to the cutoff point combined with having a very high income where only a couple percent means a huge difference.

Personally I don't have the income level where specific types of donating would be profitable to me (unless they were very small donations), but I still give to PBS/NPR (public television and radio) and my alumni associations for certain types of scholarships. Tax laws won't affect my choice there though, especially considering that itemizing doesn't add up to the alternate choice of "standard deduction" for me.

[rockouthippie]

I'm in about the same boat, but I am a certified tax preparer and do taxes for people as a part-time seasonal job. Many of them make a lot more than you or I. I have yet to see where giving to charity netted a profit. I suppose it would be theoretically possible, but frankly most rich people don't need extra tax deductions. They are usually at about the limits just for leading their lives.

Besides, it isn't those greedy old conservatives that are bitching about this. It's the democrats.

[fc*uk]

It does not really net a profit, akaik. It is kinda a choice between:

1. Give 50,000 in taxes to the government because you made 1,020,000. Last year.

2. Give 21,000 to a charity.

The 21,000 donation lowers their taxable income to slightly under a million. Say that is where a tax bracket exists. Since their income is now under a million, maybe they only owe $25,000 in taxes, or maybe they still owe $35,000.

In the first example, 21k + 25k is less than 50k, so a "profit" is turned. In the second example, sure they spent 56k but as Ted suggested, they did not give 50k to the government.

[rockouthippie]

I think you are talking about urban legend. The tax code is set up so that you don't pay taxes on income you donate to charity. I don't see how you could get a profit because the maximum benefit you could get would be 28% of your donation. I don't even think you could get close to breaking even.

Illustrated like you did with more realistic numbers:

1 million income... $300,000 in taxes roughly... Give $100,000 to charity... get $30,000 off your taxes.

[swingdjted]

50%, 30%, and 20% Limits on Charitable Contributions

* Generally, you can deduct cash contributions in full up to 50% of your adjusted gross income.

* Generally, you can deduct property contributions in full up to 30% of your adjusted gross income.

* Generally, you can deduct contributions of appreciated capital gains assets in full up to 20% of your adjusted gross income.

Charitable contributions in excess of these limits can be carried over to the following tax year. The excess contributions can be carried over for a maximum of five years.

With that in mind:

If you make $209,000 and pay regular tax, your tax would be $68,970 netting you $140,030

If you instead give $5k to tax-deductible donations, your adjusted income is $204,000, tax is $58,520 netting you 141,480

If you had donated just a couple hundred dollars, you would have profited several thousand dollars.

Really, it's a nice little way of making an extra buck if you are near a bracket mark.

Businesses have a lot more leeway with this too, but I don't know the details. It's something we took advantage of when I worked at the Boys and Girls Clubs.

[rockouthippie]

You also have to consider that if you itemize, you can't take the standard deduction. Also, the limitations (discount 20%) of your itemized deductions when your income is higher than about $150,000.

Donating to charity is not designed to be a profitable endeavor by the tax code. Charities sell it that way and accountants grunt.

Now go donate your old car to Father Martin, then talk to your tax guy and figure out you got NOTHING.