How Much is That Sweater Worth? It Depends on Your Income

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.

Thank You, Idowu Odunlade, for Your Financial Support

Property tax assessment season is in full swing in Minneapolis, with people receiving jaw dropping notices regarding how much their taxes have gone up. In my case, the bump is 16.3%. Ouch.

As I understand it, the challenges here is that proposed tax increase numbers thrown around at a city level are considerably different by the time they’re put into place. Steve Brandt explains this well at the Minneapolis Issues List:

A 7.5 percent increase in the city levy translates to tax increases of 13 to 17 percent on homes, depending on value. That’s because the city’s commercial tax base is shrinking faster than its loss of residential value, throwing more of the burden on homes.

Chances are pretty good that when you hear 7.5% you’re not actually thinking 13-17%. That could certainly be communicated more accurately to residential property owners.

Additionally, Brandt explains that quite a bit of property in the city is not contributing to the property tax base:

A big factor there is the decision by Rybak and the City Council to lock up millions of dollars in commercial property in tax-increment districts designed to finance the debt of Target Center and neighborhood programs.

As I understand it, two examples of city properties that residential property owners are making up the difference for are Target’s downtown headquarters and retail store, and Block E. Both were projects that received generous funding from the city under former Mayor Sharon Sayles Belton.

That’s not necessarily good or bad. It’s certainly great to have a Target store and thousands of employees working downtown. With the exception of Block E, downtown is as vibrant as I’ve ever seen it, and I believe that tax incentives helped get us to where we are today. Carol Becker talked about this 10 years ago on the Minneapolis Issues List:

Minneapolis downtown is thriving, with an office growth rate equal to that of the suburbs, with a thriving night life, with a booming housing market, with wonderful shopping and cultural opportunities. I also see a place that pays about 50% of the tax bill in Minneapolis.

But, it’s good to understand the costs of tax incentives like this. Corporations have gotten very good at getting cities to supplement the cost of new buildings. Projects like this deserve very close analysis.

One way to look at this: With Tax Increment Financing, you’re not giving away something for free. Instead, you’re making everyone else pay.

Property Assessments

The StarTribune has an excellent story today by Steve Brandt looking at the inequities of our city’s property tax assessments. The story explains that many people in some of the most economically depressed neighborhoods in the city are paying property taxes based on assessed property values well above what they actually paid for their homes. Ouch. One example is Nigerian immigrant, Idowu Odunlade, who’s paying taxes on her home in the McKinley Neighborhood based on a $90,000 assessment. However, she bought the place for $22,000.

I’d like to personally thank Idowu for her financial support, since my property’s tax assessed value in the Cooper Neighborhood is for less than my property’s purchase price as her’s is above. Thanks for making up the difference.

When it comes to taxes, people:

1. Don’t like surprises
2. Want it to feel like the taxes are fair (both by rate and distribution)
3. Want to know that they’re getting their money’s worth.

Minneapolitans generally feel pretty good about #3, but this week has been a rough one for #’s 1 and 2. But, they’re both solvable problems that should receive the attention they deserve.

Updates [2:45pm]: Bob Collins is asking readers to post their tax increase or decreases in the comments on his site. One trend I see is that Bob has a lot of Longfellow living readers.

Jeff Skrenes and the Irving Inquisition have some additional perspectives on this from the North side.

Update [4:25]: Mayor Rybak has sent out an email explaining why the increases were made and what he’s doing to avoid them. It’s also published to his blog here.

Mall Of America Expansion Sounds Like A Great PRIVATE Investment

After reading this:

Megamall is shopping for state aid

It’s that success that mall officials will use this week to try to sway legislators to approve $234 million in new public subsidies so the mall can more than double its size. The total public cost would exceed $300 million, including public financing already committed from the city of Bloomington.

As part of that package, under legislation expected to be introduced this week, the state is being asked to spend $181 million on an 8,000-space parking garage. Mall executives are touting the plan as a great deal for the state, which they say stands to make at least four times its investment in taxes generated by the expansion.

I realized that the proposed Mall of America expansion is a great investment. In fact, it sounds like such a good investment, I don’t see why the Mall of America would want state funding. Why not just fund in privately with their own money, or go to a bank to fund it like most American’s do. I mean, it is the Mall of AMERICA, right? Why not fund it the way AMERICANS would fund their own investments?

If you’re against taxes, you should be against this since you’re basically funding corporate welfare.

If you don’t have a problem with taxes, but would like to see your money spend wisely, you should be against this as well.

GOP Wasted Money. Time to Clean Up.

Tim Ryan outlines a basic problem with the GOP controlled congress over the past 14 years: They avoided raising taxes by borrowing record amounts of money from other countries like China:

Crooks and Liars » Tim Ryan slams the GOP over spending…

…on top of all that they [Republicans] leave the new democratic majority an absolute budget catastrophe for us to deal with. And over to course of those 14 years the republican congress and the republican president borrowed more money, more money from foreign interests than all of the previous presidents combined.

What’s more responsible: tax & spend or borrow & spend?