Perhaps when missionaries are faced with fence-sitting investigators, they should note the tax advantages of joining the Church.
The Smith family will be paying an underwhelming 0.39% federal tax rate this year on our upper-middle class income. (I didn’t cheat, I swear.) We (and other similarly-situated LDS, I assume) accomplish this feat as follows:
(1) Tithing, fast offerings, and other contribuions are, of course, deductible.
(2) So is the interest paid on our mortgage.
(3) Each child saves us $1000 in taxes.
The link between (2) and Church membership is a little tenuous, I admit. But (1) and (3) aren’t. Some thoughts:
(1) We often talk about the gov. using taxes to encourage or discourage behavior. Let me assure you that our decision to pay tithing and have or not have children did not include an exploration of the tax implications. So are tax incentives a reasonable policy in these cases?
(2) If you have 8 children, you would not pay any taxes on the first 58K of your income (not even considering any other deductions or credits). This leads me to think that there might be entire zip codes in Utah paying very, very low amounts of federal taxes. The result would seem to be that Utah has its tax burdens subsidized by those blue staters with low reproduction rates. How do we feel about this?
(3) I have to admit that my husband and I are feeling a little sleazy for not better supporting our government, which we don’t think is perfect, but is pretty darn good, as far as governments go.
Notes:
(1) To be fair, we did benefit from the sales tax exemption thingy because we bought two cars this year, but we’ve never paid over 3%.
(2) I was just joking about the missionaries.
And don’t forget the tax benefits of paying tithing using appreciated stock, either. :)
“The result would seem to be that Utah has its tax burdens subsidized by those blue staters with low reproduction rates.”
Certainly reproduction rates are not the sole cause, but it is true that “blue” states subsidize “red” states. See http://taxprof.typepad.com/taxprof_blog/2004/09/red_states_feed.html
Wow, Theresa Heinz Kerry’s paying 12.4%, which seemed kind of paltry at the time, now seems extraordinarily magnanimous:
http://www.washingtonpost.com/wp-dyn/articles/A55780-2004Oct22.html
The article goes on to show that the majority of her income was sheltered, not in some labyrinthine scheme, available only to the super-rich, but in ordinary old tax-exempt bonds that anyone could buy.
Maybe if you had paid your tithing as an in-kind donation of appreciated securities, you could have avoided capital gains tax, and your overall tax percentage might have shrunk to zero.
Yesterday’s WSJ features Stephen Moore, once again, on the flat tax:
http://www.opinionjournal.com/editorial/feature.html?id=110006227
The best part of his proposal from your point of view is that it’s optional: most people could switch in order to save or in order to simplify. You would clearly want to continue under the current system.
If I had 8 kids, I would have to make a lot more than 58k.
U.S. tax law only softens the impact of tithing, it doesn’t eliminate it. If I pay (e.g.) $5,000 in tithing, that amount of my income is exempt from federal income tax. If my tax bracket is 25% (again, e.g.), then I end up paying $1,250 less in federal income tax than I would have.
The upshot is:
1. Pay the tithing and be out $3,750.
2. Don’t pay the tithing and be out $1,250.
(I’m simplying this a great deal and not including state income taxes, but you get the idea.)
If you don’t itemize, the tax benefits of paying tithing are zero
As with the capital gains example, just another reason the widow’s mite really is more of a sacrifice.
annegb –
my parents had 7 kids and they made a LOT less than 58k. And our family was just find. I don’t think you can put a dollar amount on what it takes to raise kids well.
uhm – “family was just fine”
except that none of us can type or spell. ;)
“The result would seem to be that Utah has its tax burdens subsidized by those blue staters with low reproduction rates. How do we feel about this?”
Of course, the raising and growth of the next generation is of benefit to everyone, especially in a country where people expect to spend some time as retirees. Obviously their Social Security income depends on the size and productivity of the work force. Less obviously, so do their stock investments and even their housing investments. So there’s actually some question about whether your tax deduction is sufficient. If I recall, the average middle class child is supposed to cost more than a 100k (or 200k) to raise, although I suspect the cost is less for Mormon families, especially with large children.
Of course Nate or someone like that who thinks that language and culture and tradition and what not are negligible will say that rather than subsidizing the raising of children by Americans, we should just open up the borders and allow immigration to solve our future population needs. So maybe you should feel guilty, Julie in A. A third world child right now is crying because people like you keep having children and postponing the day when we throw the borders wide open.
Mike Parker–
What’s interesting about your analysis is that your 5K in tithing actually cost you 2.5K. So was that a full tithe? If you really want to be a full tithe payer, should you correct for the tax advantage?
Can anyone chime in with how this plays out in other countries?
Julie,
The only problem with your calculation is that it begins with the unstated assumption that the government is entitled to a fixed portion of your income (perhaps all of it) and that any reduction in the amount the government receives is a subsidy to you.
Mark,
No, not really. (At least I don’t think so, but I was an English major and this is making my head spin.) I’m just looking at the reality of ‘what you are left with.’
Mark B.
Isn’t the government entitled to whatever portion of our income our elected representatives deem appropriate? It seems like that’s the power we grant them in Article 1 and Amendment 16.
You’re right, Julie, that if you hold all other things equal, the payment of $5000 in tithing for the person in the 50% marginal tax bracket results in a reduction in tax due of $2500. That of course doesn’t reduce the amount of money that one has contributed to the church. It reduces the amount one is required to pay to the government.
And, unless you take the position that the government is entitled to that extra $2500, meaning that you should have been out the $5K to the church plus the $2.5K to the gov’t, then pocket the money and be glad. You’re not required to pay the $2.5K to the gov’t because they said you don’t have to.
On a different subject, if you feel a desire to pay more taxes, chuck the salary and become self-employed. You’ll always feel that you’re paying your own share and half of the neighbors’.
Bill,
Just to close the loop: there are two parts to what congress has done. One is to define income, and the other is to set the tax rates for different income levels.
They have defined income (at least for income tax purposes–payroll taxes for social security are another matter) to exclude amounts contributed to charity, or paid to home mortgage lenders, for example.
Interesting and painful, Julie. From the viewpoint of the Church outside the U.S., in how many countries is tithing deductible? Moreover, taxes are often much higher than in the U.S. Moreover, in some countries the taxes, which also Mormons have to pay, are used to subsidize the recognized religions. Moreover, those recognized Churches enjoy some tax-free facilities. Bottomline, Church members abroad are told they will be blessed even more because of their extra sacrifices. But it also could explain why the financial aspect seems a major obstacle in the conversion process.
I only have two kids so never looked into it, but I was under the impression that the 1,000 tax credit (up from 500 a few years ago) was good for the first children, but not necessarily all of them, depending on one’s income. Surely there are some rich lawyers with lots of kids who could set me straight.
By the way, Kerry’s municipal bonds sell at a lower interest rate exactly because of their preferred tax status. So Heinz-Kerry paid some of her tax burden (though unreported) in the form of low-interest loans to municipalities.
The fact that I am married, filing jointly, sliced $9,700 off my adjusted gross income. The fact that we have 5 children took another $21,700 off my taxable income. Add to that a tax credit of $3,000 for those children under 17, and I saved $1,600 per child.
This was taking the standard credits and deductions on a 1040A form. I have yet to figure my itemized deductions for a 1040, but even with tithing and other contributions, I think the 1040A gives me the greatest advantage.
Two things to consider:
1. Tithing is a privilege, along with a generous fast, and should not be looked at first as a tax loop hole.
2. Whatever money I get back from the federal government was mine to begin with. While I have no problem paying taxes, and receiving the benefits therefrom, I also have no problem getting back as much as the law will allow.
Julie in Austin: What’s interesting about your analysis is that your 5K in tithing actually cost you 2.5K. So was that a full tithe? If you really want to be a full tithe payer, should you correct for the tax advantage?
Well, only if you look at it from a certain perspective. Actually, I still paid $5,000 (in the example), I just paid less to Uncle Sam because I did so.
Now here’s the question: Those of you who pay tithing on your net income, do you pay tithing on your income tax refund?
Mike –
I pay tithing on my refund, but that’s because the EiC (Earned income credit) gives me back much, much more than just a refund would give me (up to ten times as much). That’s extra income, and so should be tithed.
Like Julie, I noticed that my federal income tax is a very small percentage of what seems like a plentiful income. The Social Security and Medicare taxes remain undiminished, however. Payroll taxes are more than just the one labeled “income tax.”
Brother Wilfried, I suppose you already know that the law of tithing as currently practiced predates the U.S. federal income tax, but I’ll point that out just in case.
Frank:
Generally, the child tax credit allows an individual to claim a credit of $1,000 for each qualifying dependent child. Thus, for example, a taxpayer with four children will be entitled to a credit of $4,000. The credit is phased out for certain higher income taxpayers. Specifically, the amount of the credit is reduced by $50 for each $1,000 of modified adjusted gross income (generally, the dollar amount shown on the last line of page 1 of your individual income tax return, but with certain adjustments) over a threshold amount (e.g, $110,000 for joint returns).
If the allowable child tax credit is more than the amount of income tax owed, the excess is refundable to the extent of the greater of: (1) 15% of earned income over $11,000 in 2005 or $10,750 in 2004, or (2) for taxpayers with three or more qualifying children, the excess of the taxpayer’s social security taxes for the year over the taxpayer’s earned income credit for the year.
Credits that cannot be used to offset income tax owed (because the credits exceed the amount of tax) and that aren’t refundable are lost.
The Smith family will be paying an underwhelming 0.39% federal tax rate this year on our upper-middle class income. (I didn’t cheat, I swear.)
Did you fill out Form 6251 to calculate your Alternative Minimum Tax liability? That is nailing a lot of people with kids, because it disallows personal exemptions as well as the deduction for state and local taxes paid.
You’re right, Julie, that if you hold all other things equal, the payment of $5000 in tithing for the person in the 50% marginal tax bracket results in a reduction in tax due of $2500.
The math is correct on this one, but there is no 50% tax bracket and hasn’t been since 1986. The $2,500 figure implied by Mike Parker’s analysis, which assumed a 25% rate, represents a double counting of the tax benefits; they are only $1,250.
I was under the impression that the 1,000 tax credit (up from 500 a few years ago) was good for the first children, but not necessarily all of them, depending on one’s income.
The credit is dependent on income–really rich folks don’t get it. But it is not limited to only the first children. I think the refundability of the credit (i.e., the amount that can be refunded in excess of actual tax liability—like Ivan’s EIC) is limited to the first children, but that aspect is so complicated that nobody at the National Tax office of KPMG could explain it to me when it was first enacted.
Also, thanks for the useful explanation of Mrs. Kerry’s tax burden.
As John points out, the Social Security and Medicare “contributions” are not affected by the exemptions and deductions. And, a self-employed person is required to pay the entire tax–not just the half that an employee has to pay (the employer pays the other half). Now, I know that employers factor that cost into their hiring and salary/wage decisions, but that doesn’t change the fact that for the self-employed, over 15% of the first dollar (and every dollar thereafter up to the cap–approx. $88K this year) goes to the US Treasury.
as a contract attorney, i can vouch as to the pain that paying that 15% + of the first dollar gives to one’s family budget.
Julie: You are only treating one side of the equation, i.e. the side that says “What do I get out of the tax system?” You are omitting the side that says “What does the government get out of the tax system?” If government chooses to subsidize child rearing tax payers, government is choosing to make a long-term investment, i.e. that they are giving you a small tax break now in exchange for the opportunity to tax your child’s income in the future. I’m math impaired, so won’t try to figure out the probabilities/rate of return on the government’s investment, but…I’m sure it works out.
Then again, maybe it is only a matter of time before smart folks like you are listened to by religion hating liberals in blue states who make each family pay property taxes based on the number of children in public schools, take away the child tax deduction, etc. etc. Then the Saints will truly know what sacrifice is, when they have to pay for each child’s education & don’t get any benefits for raising kids. Then we will see who is/is not willing to raise more than 1.5 children.
Sum: Nope…no guilt here.
On a 45K income and three kids, I actually got $1800 back (after a tax totalling $0) covering much of what I paid into Social Security.
That is pretty ridiculous considering the deficits we are running and the war we are fighting. Now many conservatives would reply that I should just pay more; I’m sure the government wouldn’t refuse my donation. So should I feel guilty? No. I happy to pay much more in taxes, but only if people similarly situated also pay the same amount. My few thousand dollars alone will not fix anything. If my money would fix anything, I’d happily give it. I’m pretty happy with the services I get from the government at all levels.
Regarding people paying their fair share for education: Everyone benefits from public education, even the childless (unless you really enjoy stupidity in the people around you).
Mark and others,
Just because you don’t see the “employer share” of social security on your paycheck doesn’t mean you aren’t paying it. To quote from an old
post from my blog:
First, serious tax economists consider the behavioral response to child exemptions and credits to be incalculably small. Second, if there were an incentive effect, “liberals” seem to be more interested in providing it than “conservatives”. Using data from
http://www.taxadmin.org/fta/rate/ind_inc.html
I calculated the maximum income tax benefits per child for the blue states and red states. The average maximum benefit in the blue states was $114; in the red states it was $84.
ed,
As I stated in my earlier post, I know that the employer looks at the 7.5%+ that he has to pay as part of the employee’s costs. What that doesn’t take into account is the difference between a person who has self-employment income of $75,000 and a person who has a salary of $75,000. The self-employed person may think that he has the same amount of after-tax income. He won’t. He’ll be about $5600 short.
Pheo,
I’m sure a soldier in Iraq without the necessary body armor would disagree with your assertion that “My few thousand dollars alone will not fix anything.” Let me know if you’d really like to use your tax refund to make a difference and I will help find a worthy recipient.
Mark,
That’s right…the nominal $75,000 in self-employment income is effectively less than nominal $75,000 in employed income. That’s because the marketplace is effectively valuing the employed persons work higher, so their real “economic” income is higher. I’m only objecting to your implication in #15 that the self employed pay more taxes. (I see that you alluded to this point somewhat in #25, so I apologize.)
You all need to get the “spirit of adoption!” There’s a $10k tax credit for each child you adopt, which you can take 5 years to use. With that benefit combined with those Julie mentions, we haven’t paid any taxes since 1998.
SFW and last_lemming, thanks for the info on the $1,000 dollar credit.
#29:
I’ll take your word for it that economists have proven that the direct incentive effect of childrearing is vanishingly small. I don’t know how they would prove that but I’m sure ingenuity has found a way.
I’m more interested in the social signal that child tax credits send about the value we put on bearing and raising children. I think the societal value ( or norm or whatever word I should be using–help me out here, Saintly Sociologists) that we put on having children does influence the rate of childrearing and things like tax credits do help maintain those norms.
By the way, this is probably the proper place to announce this:
THE IRS IS OFFERING FREE E-FILING WITH TAX ACCOUNTANT FIRMS FOR FEDERAL TAX RETURNS.
Go to http://www.irs.gov/app/freeFile/jsp/index.jsp? for details. You can sign up with firms like H & R Block, and e-file your federal tax return for free.
Note: 1. These firms will advertise for you to add extra, paid services (which you needn’t do); 2. If you want to file your state tax return at the same time, that will not be included in the free IRS program (I paid $20 for the state return at H & R Block, and I think that many of the other providers charge about the same).
ALSO, TO GET THE FREE FILING YOU MUST CLICK THROUGH THE IRS WEBSITE. YOU CAN’T JUST GO TO H & R BLOCK.COM, FOR EXAMPLE.
Just a little public service announcement.
:)
I should note that H & R Block (and probably the other providers, though I wouldn’t know for sure) also offers the free (assuming you go through the IRS website) option of complete e-filing (signature and all) in some cases, which allegdly cuts the refund time to about 2 weeks from filing.
I was also offered a “refund loan” at a mere 70% apr interest. I turned that option down.
Don’t forget to deduct the milage driven while in charitable pursuits like Hometeaching, visiting teaching, going to church (if you have a calling)
etc
at 12 cents a mile it will almost cover tithing.
cje
Julie/all:
Let’s not just think about tithing & taxes. What about other government “benefits” & Gospel duties?
What about the young LDS couples who receive Pell Grants to pay for college? Because they marry, the couple avoids the parental income imputation & qualifies for free $ for college. Are they somehow dishonest because they are having kids per God’s plan?
Or those same couples who use state benefits to pay for the costs of pregnancy & child birth? Are they somehow dishonest because they are having kids per God’s plan?
Lyle, if you really want to know: no, enrolling my family in Medicaid was not dishonest.
Actually…I was just trying to expand the thread by analogy.
lyle–
This is a topic for a whole ‘nother post, but I was *amazed* at the number of young LDS families taking welfare, AFDC, etc., etc., while in grad school. Didn’t they know about the Church’s counsel: first rely on yourself, then on your family, etc. etc., (Of course, as I was climbing on my moral high horse, I slipped on our application of federal loans and student housing. . . .)
Adam: ” If I recall, the average middle class child is supposed to cost more than a 100k (or 200k) to raise, although I suspect the cost is less for Mormon families, especially with large children.”
Just out of curiosity, Adam, why would the size of the children matter?
feel free to make another post :)
re: church’s counsel. Does that mean that young couples should put off having kids/eduation until they, or their families, can afford it? [yes, i’m pushing :) ]