Food for Thought

[kcjenkins]

The Obama administration has proposed limiting the itemized deduction for charitable contributions (and some other items) for higher income individuals at 28 percent to help fund health care reform.

The change would impact individuals earning $200,000 or more and married couples with incomes above $250,000 and would be effective for tax years beginning after December 31, 2009. The administration projects the provision would generate $266.6 billion over 10 years.

[joanmcq]

Even if in LA or NYC or SF, I think 250K is rich. Rich enough to be comfortable, at least. Of course its a LOT more comfortable in Podunk South Dakota, but still not bad off. I mean, I lived in NYC on less than 12K a year. Now it was 1983, but I managed, even if not too well!. Even in one of those places 5k a month will get you a pretty nice apartment.

Now the poll didn't ask whether limiting charitable deductions on Sch A is a good idea. But 28% of what? you have 30 or 50% limitations now. Limiting it to 28% of the deduction? I had heard limiting the deduction because a deduction is worth more to someone in the 33% bracket than to someone in the 25% bracket. But I'm not sure how that would be done. And itemized deductions are already limited to high earners.

[kcjenkins]

Actually, the very first question was whether limiting charitable deductions is a good idea.

[samingeorgia]

To me, the source of the income would determine whether or not the couple making $ 250K is rich. A married couple making that kind of money from employment or a profession is not "rich" compared to a couple who makes their money from investments. I've tried to explain that to a health-care professional client who lives near West Paces Ferry Rd. in Atlanta.

If you have to go out and shake the trees (as opposed to going to the mailbox) to make the money, you ain't rich.

[TAXBILLY]

http://video.aol.com/video-detail/pecan-tr...haker/619806309

taxbilly

[michaelmars]

Even if in LA or NYC or SF, I think 250K is rich. Rich enough to be comfortable, at least. Of course its a LOT more comfortable in Podunk South Dakota, but still not bad off. I mean, I lived in NYC on less than 12K a year. Now it was 1983, but I managed, even if not too well!. Even in one of those places 5k a month will get you a pretty nice apartment.

Lets disect this statement. For a family of 4 $250,000 wages is $160,000 take home. Lets subtract $2000 per month for med insurance costs. [my policy is $2200 and basic staff policy is $1700]. Down to $136000, rent- $60,000, garage $6000, auto lease $5000. Now down to $65000. Utilities, telephone, gas, etc $12000. life insurance $3000, Food for four $12000. NOW down to $38000. Clothing, college or pvt school or student loans, metrocards [subway passes] for four and lets not forget Retirement savings.

yes $250,000 is a nice income and you aren't suffering but in NYC it doesn't leave much for charity, unless you don't live like a $250000 [which obama considers rich] person.

[jainen]

>>$250,000 is a nice income<<

A quarter million dollars is way above average, my friends. Why, it's five times average, unless you twist the definition of family to include a whole lot of other sources of support. Even in New York City nobody with that kind of cash flow has any problem paying normal living costs. If they can't afford a bit of charity it's just because they covet an upscale lifestyle for themselves. Anyone who thinks a quarter million dollars is no more than comfortable is callously blind to economic reality and how they have been blessed.

It's pretty refreshing to have a community organizer in the White House, someone who can see how normal people live.

[kcjenkins]

I think the main problem that us 'ordinary people' have with this is that it does not allow for any sort of recognition of the wide differences that a flat dollar amount may represent. I'll agree that even in the high cost areas, 250K is 'comfortable'. But not 'rich'. Those are two different things. While in my area it would be 'rich', in SF it's just slightly above barely getting by. Getting by, yes, but not 'rich' by any stretch of the imagination.

Next, and even more important, since it is based on AGI, not TI, it treats a family of 10 the same as a couple with no dependents at all. And, as already mentioned, it also makes a difference how it is made. The couple who both work 60-70 hours a week to make that much, and perhaps have large 2106 expenses to earn it, is treated the same as the son of the billionaire who is getting the 250K from trust funds and investments, so that he can play all day, every day, and still make that much, and does not have any significant expenses to collect it. We've all seen clients who make the same amount, whatever the amount you want to name, and have very different amounts to spend on life style, because of all those other factors of family to be supported and educated, hours worked and expenses incurred, etc.

I think most people consider 'rich' to include at least a significant amount of time free to enjoy the money. So there is a huge difference between the person who works all the hours possible, to make his $X and the person who gets the same $X without doing anything, or even the one who gets that $X for a 40 hour work week with 3 weeks of vacation. Also there is a big difference between the person who's income continues whether he works or not, vs the one who's income stopped dead the day he stops working. Many of us know that difference intimately.

And finally, what about the impact on the charities? We all know that honest charities get a lot more 'bang for the buck' from the money they spend to deal with societal problems, over the same amount spent by government agencies. Due to things like volunteers vs well paid gov employees, ability to deal person to person, and many other factors. So taking money from the charities to divert it to government programs, however well intentioned, generally reduces the 'good' to society.

[jainen]

>>We all know that honest charities get a lot more 'bang for the buck<<

I don't know that. I can name dozens of federal government programs that outperform any private projects, especially with income support (Social Security), health care (Medicare, Medicaid and VA), housing, early childhood education, college financial aid, grants to local law enforcement, environmental protection, financial regulation, and on and on. Every one of these functions has non-profit participants but nobody can touch the overall effectiveness that our cumbersome government achieves on a large scale. Not that large scale is always the best approach to social problems, but in my opinion we get a tremendous amount of value for our tax dollars.

[Lion EA]

Lets disect this statement. For a family of 4 $250,000 wages is $160,000 take home. Lets subtract $2000 per month for med insurance costs. [my policy is $2200 and basic staff policy is $1700]. Down to $136000, rent- $60,000, garage $6000, auto lease $5000. Now down to $65000. Utilities, telephone, gas, etc $12000. life insurance $3000, Food for four $12000. NOW down to $38000. Clothing, college or pvt school or student loans, metrocards [subway passes] for four and lets not forget Retirement savings.

yes $250,000 is a nice income and you aren't suffering but in NYC it doesn't leave much for charity, unless you don't live like a $250000 [which obama considers rich] person.

NOW down to $38000. For that family of four with two children to care for while the parents work, subtract another $26000 for child care, and maybe they have a parent with Alzheimer's to care for also. THEN how much do you have for food? Don't forget that one of those children may be allergic to dairy, eggs, tree nuts, wheat and wheat germ, etc., and have expensive food supplements not deductible as medical expenses. Not to mention his medications, epi-pens, etc., which don't quite rise to the 7.5% of AGI to be deducted. NOW you have $2000 to feed and clothe four people! And, what about saving for retirement?

Or the couple I have that are both self-employed and made $300,000 last year. But the second-year consultant has made only $10,000 this year, yet so many of their benefits are based on their 2008 tax return.

I look at families making over $250,000 per year and know that they're three times better off than my family. But, I also know the expenses to live in the northeast and also see the expenses of my individual clients. The families with autistic children who keep full-time nannies (starting at $30,000 plus room and board and use of a car around here) even though the mom ends up staying home to care for the child, so no deduction for child care expenses. A friend in the midwest pays only $125 per week for her nanny to help with her autistic child.

I remember moving from Santa Barbara, CA, (not a cheap area!) to CT and finding food costs triple (we have to truck it in from FL and CA) and property taxes ten times more and heating and A/C going from almost zero to hundreds of dollars per month. And, I had to buy winter clothes! Our cars wear out and rust out in years instead of decades. And, that's not even comparing CT to IL where I grew up or MI where I spent a few years.

I wish our family made $250,000; but $250,000 is not rich.

[joanmcq]

First of all, the question is "Limiting Sch A deductions 1. do you think this is a good idea?" nothing about charitable.

Second, the car, garage & lease. In NYC these are all extreme luxuries. Nobody needs a car and unless you are in the outer boroughs no-one but the rich have them. In the outer boroughs you don't have to rent al garage. Same with SF. Don't need a car, although its nicer to have one, but nowhere to park. In LA, yeah, you need one, but c'mon, I've never spent more than $7200 on a car in my life. And you can get a pretty darn nice new one for 20K. Don't need the Mercedes or Hummer. Those are luxuries of the rich. No car, no gas. you may have the expense of renting one if you want to go upstate for the weekend though. Nanny & private schools? LUXURIES!!! insurance? I"m a single 48 year old female. My fairly crappy expensive insurance through my employer costs $60/month and I'm not talking a HD plan.I pay COBRA for dental & vision. If I had dependents my insurance would be 500-700/month, not 2200.

And that 38K left over???? THATS ABOUT WHAT I HAVE FOR TAKE HOME EACH YEAR!!! And I contribute to my retirement, pay a mortgage (in Sacramento CA, not the most expensive, but also not the cheapest place) have a car, buy some of the most expensive gas in the nation, and manage to have a pretty darn comfortable life....one of my vacations this year is jetting to London to see one of my favorite old band's reunion concerts. And no kids, but a lot of animals that you don't get deductions for.

No, the income limits don't take into account where you live, or how many dependents you have (although that is really a choice, so if you have 'em be prepared to give up other things) or a lot of other factors. As someone who had lived in pretty frakking expensive places in her life and still does, I really understand that. Yinz living in Arkansas or Mississippi or South Dakota have it pretty good, when you think about it.

[Lion EA]

I'm in CT, 20 miles from public transportation, so need my 1997 Subaru, which replaced my 1988 Subaru. The garage is part of the basement of my house, so no additional expense. If I didn't have my home office and commuted to NYC where the work is, I'd have 40 miles round trip in CT with the highest gas taxes in this country, then a parking pass for hundreds of dollars per year, plus a train ticket for thousands of dollars per year, and then maybe subway fares. Don't see how I could leave the house to catch the 7:05 train and return 12 hours later without a sitter and preschool or a drop-off day care. Glad mine are finally grown, just the college/parent loans to pay off on my stepdaughter. When we moved here for the job, we searched NY, PA, NJ, and CT, for the cheapest combination of house prices, property taxes, transportation costs, etc. We didn't expect children in the mix, though, since we'd been married for twelve years with no child appearing. Then, after settling out here in the boonies -- Surprise! Well, driving ten miles to pick up a babysitter or 20 miles to the next town for daycare really put a crimp in our budget. Sometimes, children are not a choice, unless you're willing to do something rather drastic to eliminate them. We found his required (lactose intolerant) formula cheaper in San Jose even after paying UPS to ship it out to CT. And, I stayed home for a couple of years while I earned an MBA (fellowship paid), but really had to return to work to afford oil even with our house at 55 degrees daytime, 45 night. I used COBRA after my divorce, but it runs out eventually. The Imitrex for my migraines was $85 per shot without insurance. You just can't look at someone's income on their tax return and know how much they have left at the end of the month. Geography, health, so many things eat up our money.

[jainen]

>>I'm in CT, 20 miles from public transportation, so need my 1997 Subaru, which replaced my 1988 Subaru. The garage is part of the basement of my house, so no additional expense. If I didn't have my home office and commuted to NYC where the work is, I'd have 40 miles round trip in CT with the highest gas taxes in this country, then a parking pass for hundreds of dollars per year, plus a train ticket for thousands of dollars per year, and then maybe subway fares. Don't see how I could leave the house to catch the 7:05 train and return 12 hours later without a sitter and preschool or a drop-off day care. Glad mine are finally grown, just the college/parent loans to pay off on my stepdaughter. When we moved here for the job, we searched NY, PA, NJ, and CT, for the cheapest combination of house prices, property taxes, transportation costs, etc. We didn't expect children in the mix, though, since we'd been married for twelve years with no child appearing. Then, after settling out here in the boonies -- Surprise! Well, driving ten miles to pick up a babysitter or 20 miles to the next town for daycare really put a crimp in our budget. Sometimes, children are not a choice, unless you're willing to do something rather drastic to eliminate them. We found his required (lactose intolerant) formula cheaper in San Jose even after paying UPS to ship it out to CT. And, I stayed home for a couple of years while I earned an MBA (fellowship paid), but really had to return to work to afford oil even with our house at 55 degrees daytime, 45 night. I used COBRA after my divorce, but it runs out eventually. The Imitrex for my migraines was $85 per shot without insurance. You just can't look at someone's income on their tax return and know how much they have left at the end of the month. Geography, health, so many things eat up our money.<<

How responsive to your individual circumstances should the tax code be? With hundreds of millions of families in the country, each having comparable details, how responsive CAN it be?

[Lion EA]

I think our tax code has many sections written for rather narrow segments of the population: micro-brewers in one particular state, for instance. And, I think it should be less segmented than it is. However, the questions were asking if we felt $250,000 is rich. My answer is -- it depends. Richer in the midwest and south, less rich in the greater NY metropolitan area. Richer for a childless couple in their earning years or who just inherited their parents' wealth, less rich for a family battling health issues sandwiched between ill parents and a special needs child. My answer to the original question is that "rich" varies with your circumstances and your viewpoint. I do not think our tax code should vary with our circumstances or our viewpoint. I do think it does, though.

[JohnH]

I don't equate "rich" with any given level of income. To me, rich is defined by assets vs liabilities rather than the number of dollars someone earns in a particular year. Many people have incomes which would enable them to become rich, but they squander the money on homes, cars, and toys they really can't afford. They over-extend themselves, buying stuff just because the sales manager showed them how they can squeeze the payment into their current income. I've seen others become very well-off (rich) on fairly modest incomes because they were willing to make whatever sacrifices were necessary to live within their means. I like the definition used by a radio personality who discusses finance on the weekends - Bob Brinker. Bob constantly talks about reaching "critical mass", which is his definition is accumulating enough income-producing assets to support whatever lifestyle you think you have a right and the ability to enjoy. Anyone who isn't arranging their affairs to work toward that goal isn't rich in the present - and the sad fact is they will have no hope of becoming rich unless they change their spending & consumption habits.

As for the tax issue, my answer won't exactly respond to the original question, but in my mind it would answer it. I think all tax deductions for "lifestyle" spending should be eliminated. No tax deduction for home mortgage interest, property taxes, contributions, etc. No exemption for dependents. I'd make medical insurance 100% deductible for everyone and all non-elective medical expenses 100% deductible. Provided the tax rates were lowered to compensate for the offset in deductions, we would then be in a position to allow people to make rational decisions about how much they spend for housing, how many children they have, and all those other lifestyle decisions without getting confused about the "after-tax" costs, which in many cases is just an illusion anyhow. Getting some of the smoke & mirrors out of the tax system would make it much easier to understand.

[taxxcpa]

I don't think charitable deductions should be allowed since they are discretionary expenses. What should be fully allowed are medical expenses and employee business expenses since those are not discretionary and hit some people disproportionately.

People who donate to charity are not motivated by tax deductions. They give because they want to promote something they believe is worthwhile. Political donations are also sometimes motivated by the same thing in the case of smaller donations that do not buy special personal benefits, but these are also not something the tax laws should address.

[David1980]

I think "rich" is often a perception of relativity. For those making $250k a year, it probably doesn't seem like a whole lot compared to their friend who makes $500k/year. For the person making the median salary $250k is rich, anywhere in the country. The reality is the average person can't afford a nanny, private school, $5,000/month rent, etc... Heck, there are many people who can't afford decent health insurance. Obviously the person making $250k in a big city feels they're better off even with the higher cost of living, or else they'd relocate to a low cost of living area at lower salary.

I do agree that the tax brackets and phase outs don't reflect regional variances in cost of living. It would be difficult to create a system that actually could tax everyone based on their specific circumstances. So while not perfect, the "bracket" system is one of the less crappy systems among many other crappy systems. Where the tax brackets increase, where phase outs start and end, those could be updated (and everyone would probably have different views depending on what they feel is important as to what should be where.)

[GeneInAlabama]

God has the perfect system. He says "give me 10% of what you make", no matter how little or how much. Our government trys to be more fair than God and has made a big mess of it. The fairest way of all would be to determine what percentage is needed and charge a flat rate. No deductions, no exemptions, no nothin. Of course that would put us out of a job, but that would be the fairest way of all.

[jainen]

>>The fairest way of all would be to determine what percentage is needed and charge a flat rate<<

In my opinion, that is the LEAST fair method imaginable. Not only does it mean people on Easy Street get subsidized by real hardship cases, but it does not reflect the greater access to government and economic benefits that some taxpayers enjoy.

The biggest problem with a flat tax is in the way you define "income." You say no deductions, no exemptions, no nothin. Do you mean a traveling salesman can't deduct the costs of travel or the cost of goods sold? Would you not deduct basis on a capital asset, or what should be excluded from basis? Would you tax accrued income whether or not it was received, or would you exclude bad debts (which would also need to be defined)? If you tax only money received, what about voluntary (whatever that means) exclusions like a 401(k) or direct payments for charitable contributions?

And how do you define taxpayer anyway? Would a corporation pay the flat tax on its income, and shareholders pay again on dividends? Would the same double taxation hit partnerships? Why shouldn't a sole proprietorship likewise be taxed exactly the same as a corporation? Or do you propose that only individuals pay tax, not business entities? Or only certain business entities but not others?

In my opinion, the whole idea of a flat tax is nonsense.

[GeneInAlabama]

I took the original post to mean W2 wages. Obviously with businesses, net income would have to be determined. I feel that sole proprietors should pay a flat tax on their NET income, partners pay on their share of profits, and of course corporation officers and employees receive W2s. Yes, a LOT of changes would have to be made. And of course, accountants and tax preparers would still be needed, but a lot of us who receive a large part of our income from simple returns would be out of work.

[kcjenkins]

All the issues you guys are bringing up are part of the reason that the very wise Founding Fathers wrote into the Constitution a prohibition on tax on income. User fees are fine, a national sales tax would be fine, as long as we repeal the 16th Amendment at the same time. But think how much power that would take away from the Politicians. That's the real reason it is highly unlikely to ever happen.

[Catherine]

I will recommend that everyone read the US Constitution. It's available free online, and is only about eight pages long. Add in all the amendments and it's another few pages. Well worth the time and trouble.

One note: the first ten amendments should be looked at as a group; they are all specific limitations on Federal power in favor of states and individuals. Remember, one of the biggest hurdles the Constitution had to overcome was the fear on the part of the states that the Federal would "take over" sovereignty of the individual states. The Bill of Rights was designed to address those fears so the states would ratify the new Constitution.

[JohnH]

I agree on the reason for the Bill of Rights. So how's that working out for us?

[Catherine]

I agree on the reason for the Bill of Rights. So how's that working out for us?

http://www.tenthamendmentcenter.com/2009/0...ty-resolutions/

Eight states have passed state sovereignty resolutions and more are in the works.

[taxxcpa]

All the issues you guys are bringing up are part of the reason that the very wise Founding Fathers wrote into the Constitution a prohibition on tax on income. User fees are fine, a national sales tax would be fine, as long as we repeal the 16th Amendment at the same time. But think how much power that would take away from the Politicians. That's the real reason it is highly unlikely to ever happen.

I don't think the prohibition was on taxing income although that would be the effect of the clause requiring states to be taxed equally which would preclude a federal income tax, but would not preclude a state income tax.

Each state was originally regarded as something like an independent county that was part of an alliance among equals.