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Monday, February 14, 2011

Wanting to Pay More Taxes and Charitable Contribution Issues

The other day, a few of my graduate tax students asked why Congress had enacted a Social Security tax cut for 2011 for all employees and self-employed rather than keeping the money for deficit reduction. That is a good question. If Congress wanted to provide some benefits to low-income taxpayers, they could have reinstated the Making Work Pay Credit which reached fewer individuals and was a smaller tax cut. So, Congress seems to be sending a message to the public - "Deficit? What deficit?"

An article in today's Wall Street Journal tells the story of some parents in Kansas that want to pay more property taxes to better fund their schools ("Tax Compliant: Too Low"). But, there is a limit on school funding so the state says they can't pay more property taxes. The purpose ties to equity and keeping more uniform funding among all schools.

These are interesting stories - some people want to pay more taxes! Solutions:
  1. Write a check to the government.
  2. Write your elected officials to let them know you want to pay more taxes.
  3. For the school issue - make a charitable contribution to the school.
The last option will get most taxpayers and the school to the same situation. For individuals who itemize their deductions, both the charitable contribution and property taxes are deductible. So, what is the property tax and equity limitation yielding if parents just donate what they would otherwise like to pay in taxes? This is an oddity in the law for many reasons, such as:
  • Whether paid as property tax or a charitable contribution, itemizers get the same tax treatment (unless they are subject to a charitable contribution limit due to donating over 50% of their income; but that is likely not the case for most of the parents).
  • The federal and state governments are subsidizing the payments. That is, when the payor takes the tax deduction, they save on their taxes. The higher their tax bracket, the greater the savings (and the share of the contribution really paid by the government). For example, if the parent has a federal marginal tax bracket of 25% and donates $1,000, they save $250 of taxes (if their tax bracket is 35%, they save $350!). It is as if the federal government made a payment to the school of $250. Yes, that means that large donations by high bracket individuals to what might already be well-funded schools, results in a federal government subsidy to the school that likely doesn't warrant it under any government program other than the tax law! The charitable contribution deduction is available even if your child is one of the beneficiaries of your donation.

So, I think the story points to two problems in the law:

  1. It is not obvious or easy for people to pay extra taxes of their own volition.
  2. Tax deductible payments include government subsidies. These don't show up in the school budgets though. The deductions enable the donors to donate greater amounts - the higher the bracket, the greater the donation ability and the greater the government subsidy.

Solutions include:

  • Converting the charitable contribution deduction to a tax credit that is the same value for all taxpayers.
  • Limiting the deduction when you donate to your child's school due to the reality that your child is a beneficiary. When you pay tuition at the private school your child attends, you get no tax deduction because your child is a beneficiary. Is it that different when you donate to your child's school? And, I have heard from some parents that at the start of the school year, the PTA or Home & School Club calls the parents and requests a donation with the amount based on how many children you have at the school - is that really a charitable contribution or a direct benefit for your child?
  • Stopping the assumption that everyone wants a tax cut. Some people want to reduce the deficit!

What do you think?


Peter Reilly said...

If you don't run into the 50% limit, a charitable contribution is better than property tax deduction because of AMT.

Peter Reilly said...

In Mass raising property tax over certain level requires an "override vote". Generally this will pit the "school crowd" against the "senior citizens". One year there was talk about charging for activities like sports if there was not an override.

I suggested that the people in favor of the override pledge to give what they would have paid if it passed in the event it didn't pass. Suggestion did not go very far.

Peter Reilly said...

Hope I'm not overcommenting. I think the point of the social security break is that a small increase in net pay will get spent and have a stimulative effect

Professor Nellen said...

Peter - thanks for the comments. The AMT difference does make the charitable contribution deduction a better option for many taxpayers aiming to maximize their deductions. It all is still an unfortunate way to fund schools.