Tuesday, July 7, 2009

Sorry, Renters! The U.S. Government Doesn't Value Your Philanthropy!

Here's a story of two typical taxpayers.

The first is a single, new homeowner who pays $5,000 per year toward mortgage interest. She pays state and local taxes of $1,500, auto excise taxes of $100, and she also gives $3,000 per year in donations and direct gifts to charities, which include her church, Big Brothers & Big Sisters, and the American Cancer Society. Great gal.

On her IRS return, her standard deduction if $5,450 in 2008. Her deductions total $9,600, which means she can itemize deductions, and with a 33% rate, save an additional $1,480 on her taxes.

The second taxpayer is a single guy who rents. He pays state and local taxes of $1,500, auto excise taxes of $100, and he also gives $3,000 per year in donations and direct gifts to charities, which include his church, Child Adocates, and the American Heart Society. Great guy.

On his IRS return, he can't itemize his deductions because they don't exceed the standard deduction of $5,450. This means he gets NO tax benefit for his charitable contributions.

And herein lies the distortion that comes from a tax code that plays favorites for corporate interests (mortgage brokers, banks, realtors, inspectors, and homebuilders) who want you to buy and finance homes - one persons's charity is more valuable than another's.

Sure, the easy answer is....everybody get a house and carry the paper. That's what they want. But what if you can't? Or what if you've worked hard enough that you almost paid for your house in cash. Or what if you've paid long enough that the interest due is small. Now YOUR charitable contributions aren't worth as much because you aren't carrying the mortgage interest.
How is this fair?

Sorry, but if I were in Congress, I would pass a law that said every American would get a tax credit up to a particular dollar amount for charitable contributions. It would not cover ever contribution dollar for dollar, but at least the starting point would be more equitable.

I might even toy with the Biblical notion that giving is more meaningful when you don't have a lot to offer. Thus, if you made $50,000, and you gave $5,000 (or 10% of gross wages), you'd get a higher credit than if you made $200,000 and gave $10,000 (5% of gross wages). Of course, I wouldn't want to replace one "unfair" system with another, so the specifics would have to be worked out. But it would hopefully induce those with more resources to move their "donations" AWAY from high-interest homes and more into charitable giving.

Food for thought in the early morning. Discuss amongst yaselves.



Russell said...

I have to disagree with you on this. The single guy still gets a tax break, he just gets the standard deduction. In fact, with the standard deduction, people usually get a larger tax break than what they've laid out because you can max it out even if you haven't given that much. The homeowners only gets to write off what they've spent or donated, they don't get to round up.

To sum it up, under your examples, both people get to write off what they've donated or spent (on taxes), the amounts they get to write off are different because they have different expenditures.

Chris Worden said...


I understand your point generally, but ask yourself this question:

What is the difference in how the tax code treats the single guy in my hypothetical and a single guy with the exact same numbers except he doesn't give to charity at all? Answer: There isn't any.

They're treated exactly the same. This means that UNTIL a person reaches the standard deduction, the federal government does not place value on your charity, thus the title of my post.

The value of a charity tax credit is that, even if you reject my progressive format, it has value for the donor from the first dollar given.

That value doesn't hinge upon: (1) how insane my house's interest rate is; (2) how expensive my car's excise taxes are; or (3) how high my state and local government's income and property tax rates are (among many other deduction types).

Anonymous said...

Russell is correct in my opinion. We all make choices in our lives and then live with the consequences. Some people choose to rent all of their lives. While they dont get the tax deduction [except on Indiana State taxes where there is a renters deduction], they also dont have the maintainence and upkeep that an owner does. If something goes wrong in your rented home, you call the owner and he pays for the repair. I am in the worst of both worlds in that I no longer have a mortgage on my home....a goal that many of us have but ....we receive no interest deduction since we have no mortgage. I have to live with that. I choose to pay extra each month and choose not to buy a new house every few years. I benefit from the standard deduction just like a renter does.

Miklo Velka said...

Russell and Anon 12:19,

You both make good points concerning those particular remarks (Russell - renter potentially gets an "unearned" deduction via the standard ded.; Anon - sometimes owning a home is more costly that renting due to maintenance and upkeep) but, you both miss Chris's point:
The Tax Code directly and explicitly gives a benefit in the form of a more-fully-valued above-the-line tax deduction to the homeowner WITH A MORTGAGE (*Note, Anon, you concede the point that mortgage-less homeowners do NOT see this same benefit) that the code does NOT give to renters.

While both Russell and Anon's points are good, they don't dispute the validity of Chris's argument.

Nothing in the tax code states that standard deductions are valued so based on typical charitable giving by the average tax payer. Nothing in the tax code states that mortgage interest is deductible because the code wants to ameliorate the effects and costs borne by homeowners from maintenance and upkeep. Rather, the code gives the mortgage deduction because the homepwner (Ha!) is paying huge sums of money each year to banks in the form of interest, and the tax code makes interest payments of many, many, kinds deductible.

In closing, the renter can choose to give charitably or not to give charitably and she won't see a difference in her deductions either way. The homeowner with a mortgage will see the deduction, or won't, based in direct correlation on whether the charity is given or not.

Anonymous said...

Miklo, I agree with everything you write. My option is to increase my charitable giving. Fortunately I am in good health and have decent insurance so I can not meet the floor for medical expenses. [but who wants to] I do have the option of putting money into a tax shelter. I am lucky in that I am in a place in my life where I can do that. In my younger years, I couldn't and most young people now cannot afford to do that.

Miklo Velka said...

...and many young people are avoiding purchasing a home because of this crummy market...thus leading to fewer and less charitable givings when no appreciable tax benefit can be realized.

Chris Worden said...

I love when my readers flesh out the discussion better than I ever could have, so thanks to all who posted. It's been great food for thought.

I debated on my my headline, but now I know it is misleading because because renting versus non-renting is not the focal point. It's heavy mortgages versus light or non-existent mortgages.

If you start with two ideas: (1) charity is the best thing our tax code subsidizes, and (2) people are more likely to give if they get a financial benefit, then my idea is fundamentally sound.

But I've pitched it to the wrong people. Maybe the REAL "untapped market" isn't renters at all (some of whom have taken into consideration the downsides of homeownership certainly, but probably many more who just can't afford to buy a house). Maybe the real untapped market is the Anon's of the world who have enough resources to double up on mortgage payments. If we told all those folks that we'd give them a deduction from the first dollar, I KNOW they'd give more than they do right now.

What a windfall that could be to the philanthropic organizations that are suffering now.

Anonymous said...

I include myself in this group but perhaps many of us should direct our charity from the heart and not for how it will help our tax bill. My problem is that I tend to donate to causes or candidates and none of those contributions are deductible as well as they should not be.

Jon E. Easter said...

That's one of the many reasons why I was anxious to get back into home ownership. I went from waiting until April 15 because I owed to filing taxes as quickly as possible to get my refund.

Miklo Velka said...

Anon 4:31,

I agree. However, ya know what's the worst thing about altruism?

It doesn't exist.

The sooner the tax code begins to recognize this, the better off, as Chris notes, philanthropic organizations will be.