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I’m procrastinating (uh, I mean working) and came across this item about Rick Warren, pastor of the Saddleback megachurch in California and bestselling author. He says he “reverse tithes”—gives 90% of his income to his church.
I’m wondering how that works. Current charitable deductions are limited to 50% of AGI. Anything beyond that can be carried over to future years, but that wouldn’t help Warren if he gives 90% every year. If he actually donated 90% every year, he’d still pay tax on half of his income. If he earns $10 million and pays an average of 30% in tax, he’d have to pay 30% of $5 million, or $1.5 million in tax. Given that he only keeps $1 million, he’d come up $500,000 short every year. (It could be worse than that. The top individual income tax rate is 35% and he also has to pay California state income taxes, assuming his residence is near his church. And income-related phaseouts of itemized deductions and other provisions could further raise his effective tax rate.) Maybe he pays the shortfall out of his savings, although that seems unlikely. Maybe he includes the taxes he pays in the 90%, although in that case, he’s way overstating how much he’s giving to the church. It’s likely 75% of his income or less. Maybe he gives 90% of his after tax income. (Law professor Ellen Aprill pointed out to me that there is a lively debate about whether tithing refers to pre-tax or after-tax income. See, e.g., this theological discussion. My favorite bit of guidance on whether to tithe out of gross or net income is: "just decide if you want net blessings or gross blessings.")
Maybe Warren channels a portion of his book royalties directly to the church, although it’s not clear that this would be kosher. Ellen discussed the tax consequences of Obama’s doing this with his Nobel Prize on the taxprof blog. In Obama’s case, a special rule would allow redirecting Nobels and Pulitzers, but that wouldn't apply to book royalties.
Alternatively, Warren might have donated all or a share of his book copyrights to his church. First Lady Hillary Clinton donated her book royalties to charity, but Tax Notes pundit Lee Sheppard suggested she should have donated the copyright and claimed an up-front charitable deduction without ever taking the royalties as income. Law professor Calvin Johnson pointed out that she couldn’t claim a deduction because the copyright is not a capital asset. (The same rules apply to artists who donate artworks to museums. It’s the right answer from a tax perspective, but is extremely unpopular with wealthy artists and museums.)
Rev. Warren’s had trouble with the IRS in the past over his $80,000 a year parsonage allowance, which the IRS argued was excessive because it exceeded the fair market rental value of his home. Warren argued the allowance should be entirely tax-free on the grounds that it’s an important aid to struggling clergy. Although courts ultimately ruled in Warren’s favor, the Congress later changed the rule in line with the IRS’s interpretation.
Viewing seemingly mundane events through the prism of tax policy can make them endlessly fascinating.
Happy New Year!
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