Paul L. Caron

Monday, January 4, 2010

Tax Consequences of Extreme Philanthropy

Following news of Rick Warren's dramatic appeal for $900,000 in contributions in 48 hours to close a year-end budget shortfall, and his Saddleback Church congregation's response of $2.4 million in gifts, Len Burman (Syracuse) blogs the tax consequences of Rev. Warren's extreme philanthropy (he "reverse tithes" -- he gives 90% of his income, including royalties from his The Purpose-Driven Life book, to his church and lives off the remaining 10%): 

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.

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The 90% gifts might be made over multiple years...perhaps over 10 years.
Remember Ted Turner and Warren Buffet making installment gifts that were marketed as a lump sum contribution.

Posted by: Steve Karpa | Jan 6, 2010 6:04:45 AM

The royalties obviously are a challenge, but I wonder if he doesn't tell the church "don't pay me x; pay me x-y" and count y toward the 90% tithe - avoiding including y in gross income and thus not subjecting it to the AGI limit.

Posted by: David | Jan 4, 2010 1:27:58 PM