While there are many strange things in the federal tax code, one thing that I find particularly strange is how donations are valued. The strange part about it is that the same item will take on different values depending on who gives it away.
For example, let’s say that a married couple filing jointly with a combined income of $65,000 donates a sweater worth $10 to Goodwill. They would fall into the 15% tax bracket in 2010 (the income they earned after their first $16,751 would be taxed at that rate). So, because of that, donating a $10 sweater to Goodwill would lower their taxable income from $65,000 to $64,990. And, because their taxable income was reduced by $10, their taxes could drop by their highest tax rate, 15%, saving them $1.50. More simply, they’d save $1.50 on taxes through their $10 donation. The same would apply if they cut a check for $10 to their favorite charity.
Now, let’s assume that the same couple made $5,000 more per year, pushing their combined income up to $70,000. Their earnings from $68,001 and up would be taxed at 25% rather than 15%. Now, when they donate the $10 sweater, they’ll knock their taxable income down from $70,000 to $69,990. The $10 in lowered tax taxable income will be taxed at the higher rate, 25%, so they now save $2.50 rather than $1.50 when they donate the exact same sweater.
Assuming that the same couple made more than $373,651 in a year, they would find themselves in the highest tax bracket, 35%, which would allow them to save $3.50 on their taxes when they donate the exact same $10 sweater.
That’s right. We pay the rich more to do the exact same charitable deed as those less well off.
Not a bad deal for high income earners, eh? The more likely you are to be in a position to donate goods and money, the more the government will reward you for doing so.
Of course, high income earners have other deductions they can use beyond $10 sweaters to lower their taxes, such as home mortgage interest deductions. There is a limit on this. You can only deduct interest on up to $1,000,000 in home acquisition debt, which means that a wealthy couple with a $1,000,000 home may only be able to reduce their income by something like $50,000/year in the early years of a new home purchase, (thus receiving nearly $17,000 in tax savings annually in government subsidies for their million dollar home). Check out Bankrate if you want to rn the numbers on how much interest one pays on a $1 million home loan in a year. Someone with a $1 million home loan can reduce their taxable income by the average American’s annual salary under the current home interest deduction criteria.
While becoming rich is no easy task, our government’s tax policies do a fine job helping the rich act rich and stay once they’re rich.