#TaxMinimization #CharitableContributions #WealthManagement
You may have heard whispers or seen headlines about how the wealthy leverage charitable contributions to vastly reduce their tax burdens. 🤔 It’s a concept that can seem baffling or downright unfair at first glance. After all, how can donating money actually lead to paying less in taxes overall? Let’s break it down and explore how the rich strategically use charities to minimize their tax liabilities. 💸
## The Basics of Charitable Contributions and Taxes
When individuals or businesses make donations to qualified charitable organizations, they can typically claim a tax deduction for the amount donated. This deduction reduces their taxable income, ultimately lowering the amount of tax they owe to the government. 💰 However, the key point here is that the donation still requires giving up a portion of their wealth. So how does this process benefit the donor financially in the end? 🤷♀️
### Maximizing Tax Deductions
One strategy utilized by the wealthy is to make large charitable contributions in specific years to offset high-income tax liabilities. By lumping together significant donations in a single tax year, they can potentially exceed the standard deduction and itemize their deductions instead. This can result in a more substantial tax benefit than if they were to spread out their donations over several years.
### Donor-Advised Funds
Another popular method is to utilize a donor-advised fund, which allows donors to make a charitable contribution to the fund and receive an immediate tax deduction. The donor can then recommend how the funds are invested and distributed to qualified charities over time. This strategy provides flexibility in timing donations for maximum tax benefits while still supporting charitable causes.
### Appreciated Assets
Wealthy individuals may also donate appreciated assets, such as stocks or real estate, to charities instead of cash. By doing so, they can avoid paying capital gains taxes on the appreciated value of the asset while still receiving a tax deduction for the full fair market value of the donation. This can be a particularly beneficial strategy for individuals with highly appreciated assets in their portfolios.
## The Compliance Factor
It’s crucial to note that the IRS closely monitors and regulates charitable contributions to prevent abuse and ensure compliance with tax laws. The wealthy must adhere to strict guidelines and restrictions when claiming charitable deductions to avoid potential audits or penalties. Any attempts to improperly inflate the value of donated assets or engage in fraudulent schemes could result in severe consequences.
In essence, while the wealthy do indeed leverage charitable contributions to minimize their tax obligations, it’s not without adherence to legal frameworks and regulations. By strategically planning their charitable giving and utilizing available tax deductions, they can effectively reduce their tax liabilities while also supporting causes they are passionate about. 🌟
So next time you hear about a billionaire making a sizable donation to a charity, remember that there’s often more to the story than meets the eye. Charitable contributions can be a powerful tool for achieving both financial and philanthropic goals, even for the wealthiest individuals in society. 💡
One doesnt make money on charity tax returns. having a charity in your business structure is a place to park and spend money. charities only have to use 10% of donations to the cause. and I’m sure they get taxed less.
if you made a million dollars. instead losing 50 percent of it. You can donate it to a charity you own. Use ten percent for a good cause and appropriate funds you need through the charity. Rinse and repeat. I’m sure there is other benefits as well.
A common way is that the rich person sets up a charitable foundation that they have sole control over. All the foundation does is (supposedly) distribute money and other assets to other charities in the form of donations. Rarely does the foundation engage in any charitable activities itself. Effectively, its a charity in name only. So the rich person donates money to their charitable foundation. Or they donate stock or other assets to the foundation. They deduct from their taxes the money or the “value” of the assets which they can likely inflate for their tax deduction.
The foundation might hold on to the money or other assets for decades and never really distribute them to other charities. Meanwhile the rich person – as the sole person with control of the foundation – maintains control over that money and those assets. They can’t ever spend the money directly on themselves without theoretically getting into huge trouble, but simply controlling it it gives them influence. And of course if the foundation owns stock it would have the voting rights to that stock and with the rich person being in sole control of the foundation, he has sole control of those voting rights. The money earns interest, the assets might appreciate, and meanwhile no one is paying any taxes on any of it.
And then of course you’ve got these foundations employing people like the rich person’s friends and paying them a salary that’s probably completely out of line with any actual work they may actually be doing for the foundation. And by “people” we can include the rich person’s family and even the rich person his or her self – after all, aren’t they entitled to be compensated for all the “work” they’re doing for the foundation?
Also sometimes they own/controll the charity and use it for lobbying for things they wanted anyways. In essence they move money from one pocket to another.
Plenty of people pointing out how the tax deductions work and how it doesn’t really result in the rich people keeping their money just them paying less taxes, but there’s another important note when the rich person also controls the charity they’re donating to.
Elon Musk is a great example here. He donates a significant amount of money to the Musk Foundation to cut down on the amount he pays in taxes, but he’s on the Board of Directors for it so he still controls that money and the Musk Foundation doesn’t really give out that much. They gave a chunk of money to Cameron County to help their schools and revitalize the downtown core… Right after one of his rockets exploded over the place sending shrapnel all over. He also likes to talk about how the Musk Foundation builds schools, but those schools are all being built near worker communities for his factories, and having access to a school is kind of important to get families to move out to these communities. He’s getting tax breaks for donating to charity, but none of the charity work is being done for actual charity. It’s just another branch of his company.
Donating money removes if from your “taxable income”. The benefit is that you donated to a charity you wanted to donate money to. There is no financial benefit to doing it for the donator EXCEPT That if you donate enough money, you get praised for doing it and people think you’re a great person, which you very well may be.
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If people complain that some super rich dude donated money somewhere for “tax purposes”, then they have very little understanding of how taxes work. If a billionaire donates a million bucks to charity, good for them. What they get out of it is that we say “Wow, that guy donated a million bucks!” it’s good PR.
They control the charities. So they donate the money, get tax breaks, and receive the money back later.
Own nothing, control everything. The rich often set up private foundations with millions of dollars. They and their families can work for these foundations often at a very good salary. The money is passed to the foundation tax free. The foundation can do something nebulous and difficult to say if anything was accomplished like : raising awareness about something. The foundation has to payout 5 percent of it’s net worth every year including what it costs to administer the foundation but the fund is often earning double of what it’s paying out and so continues to grow. But you can’t payout too much to yourself or relatives or the IRS will come knocking. And you can’t donate to politicians. But you can hire their kids or spouse and transfer money to the politician’s foundation. It’s a big club but you ain’t in it.
It’s not a financial benefit but giving money to charity is soft power. Ie my dad used to work in a school and caught a boy running a protection racket, they didn’t want him expelled because the kids family gave money to the school.
Firstly, the people here saying “the rich don’t gain anything from this” are mostly lumping “millionaires” with “hundred millionaires” and “billionaires.” There is a GIGANTIC difference between each of those. Like, as big of a difference between someone who has $1,000 in their bank account and $1m in their bank account.
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So let’s just talking about the ultra wealthy ($100m+ net worth). The main way they minimize taxes is by setting up their own charitable foundation. When you transfer your wealth to a charity, you get to deduct that from your taxable income.
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Super simplified:
– Let’s say someone made $10m in a year (through salary, dividends, or selling stock). Instead of paying taxes on that $10m, they donate it all to their foundation. Now they have $0 income for the year, so instead of paying around $2m in taxes they pay $0.
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– What might an ultra wealthy person spend money $10m on in a year? Give it to their kids? Buy a private jet and fly around the world? Buy priceless art? Maybe a painting of themselves? Throw extravagant parties? But instead they give $10m to their charity, yay helping the needy!
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– Then the foundation hires the rich person’s kids as the directors at $500k salary. The charity sets up offices all around the world, so they need to pay for travel and accommodations at all those locations. The charity buys a Picasso to hang on the walls. They need to throw large fundraising galas.
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Speaking of art:
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– Two billionaires, Billionaire1, Billionaire2, all set up nonprofit art museums.
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– Billionaire1 donates $10m to his museum, and the museum purchases a minor Picasso previous worth $1m for $10m dollars It even makes the news! (“minor Picasso painting sells for $10m!”)
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– Billionaire1 gets to deduct $10m from his income, he saves $2m from his taxes that year, foundation, museum gets a Picasso now worth $10m.
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– Billionaire2 also has a minor Picasso he had previously purchased for $1m. Instead he donates it to his foundation, and puts down $10m as its value (because didn’t you read the news? minor Picassos are now worth 10m). Now Billionaire2 gets to deduct $10m from HIS taxes.
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– Billionaire1 and 2’s net worths essentially stay the same (if you include their foundations as part of their net worth), except they both got to skip out on having to pay $2m in taxes.
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(This isn’t the only way billionaires use art as a way to enrich themselves btw, they also take non-taxable loans against it, or take out ever-increasing insurance policies, etc).
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So next time you ask “why are people paying increasingly large amounts of money for pieces of art at auctions?” Now you know why.
the run the charities as vanity projects so they are just paying themselves with their own money to avoid taxes.
So, the trick is to donate money to a charity that you still effectively control.
Yes, it isn’t a zero tax hack for everything, but if you have personal goals that can be accomplished via a charity, routing money though one is a solid way to avoid being taxed on that amount.
There are other corporate charitable donations that create income. Case in point, Susan Komen Foundation gets a small portion of every purchase of a box of cereal because, let’s say, Cheerios is the corporate sponsor. The cereal company takes the write offs, all while they boost their overall sales of their product and add to their bottom line, from a consumer who perhaps wouldn’t have bought cereal or bought another brand. The consumer wants to support Komen and feel as if they’ve gained some benefit from the transaction other than altruism, because they think they saved money on a product with an already astronomical mark up.
When the drive through at the fast food joint or the gas station attendant asks if you’d like to donate to charity X, they collect your cash, donate it to charity X, and then take the write off. Charitable money laundering. You want to donate to a charity, send it to them direct.
When someone owns a charity they get pretty sizable tax breaks.
Take the Walton Family. These figures are from 2015, but they had their own charity, the Walton Family Foundation, and they donated something like 0.04% of their income to it – about 58 million dollars over 23 years, but just owning the charity gives them a tax break of over 3 billion per year. What they spend is less than 1% of what they save.
The IRS only requires a charity spend 5% of their income on their mission, which also opens the door for people to utilize Jackie O. Trusts. Essentially, this is where any unspent donations after 20-30 years are returned to the beneficiaries, tax free. Going back to the Waltons, this means that of the tiny percentage they give to their charity, only a fraction of that is spent on their mission – the rest goes to other members of the family.
There also isn’t much oversight on how charities spend money, or what they spend it on. Going back to the Walton Family Foundation, it funds the Crystal Bridges Museum of American Art… where they display Alice Walton’s collection of art. Essentially, they get a massive tax break every year for spending a tiny amount of money on their own property, and anything they don’t spend funds their families lifestyle.
It doesn’t benefit the donor at all. It benefits the charities. People just like being able to demonize people for having money
They create their own charitable foundations which they are able to operate within the rather loose guidelines of what makes it a charitable foundation.
Lets make up a rather egregious but probably borderline legal example:
Say I developed a charity that disburses scholarship money to deserving high school students. Every year, the charity picks out 10 deserving students from my hometown school and awards them with $10,000 to put towards their further education.
This charity only costs me $100,000 to operate. I cannot afford that, so lets also pretend I’m stinking rich. I like this example. I want this charity to stay afloat forever. At first I’ll need to donate $100,000 every year. That’s not saving me money though, I’m just giving it away.
One way to make a charity self sufficient is to set up investments in what’s called a “trust”. This trust sets guidelines that decide how the investments are managed and how the funds are disbursed for charitable purchases. i.e. the trust would decide how much money can be given away every year, and it can also decide the eligibility criteria for deserving students. I can manage the trust myself or appoint another person (or family member) to do so. As long as the foundation operates within the guidelines of the trust, it should qualify as a charitable donation.
Now time for the abuse. I want to live a lavish lifestyle, and I want to pay for it as efficiently as possible.
Lets say I earned $10M last year, and I want to buy a house. Instead of paying taxes on that $10M and being left with around $6M for myself, I decide to donate the entire $10M to my charity. I then direct the charity to purchase a $9.9M home which I will be allowed to rent at a discounted but otherwise “fair” rate of $5k/month. The other $100k can go to the students.
The home is property of the charity, it’s an asset, and it’s expected to appreciate in value. Therefor it’s contributing to the future health of the foundation. It doesn’t matter that it will be our family home for generations to come.
Next year I earn a lot of money again, and I want to furnish and decorate this home to my liking, so I buy obscure paintings and artwork through private deals. The real purchase prices are often not public, but I know a high end art dealer that can get them appraised for a high value.
I commission 5 paintings from different artists for $10,000 each. I get my appraiser to value them, and he determines that due to the uniqueness of this one it’s worth $100,000. Another is only $5000. This one here is $20,000. These paintings aren’t hitting the auctions anytime soon, so there’s not much fact checking going on. The appraiser knows the game.
The $100k and $20k paintings, I donate to the charity at the appraisal value. The other three I keep for myself until they “appreciate in value”. All 5 of them get hung in the house I rent from the charity. I get a charitable donation deduction for the $120k of donated assets to the charity. My tax rate is around 40%, so that deduction is worth $48,000. I effectively commissioned 5 professional paintings for only $2000.
All of the physical assets I would buy for myself, I am using clever ways to deem them as assets and growing investments held by the charity, and using the home as a storage facility for these assets.
What’s next? Well vacation homes of course. The charity holds real estate in the trust, so lets expand that. The charity buys a property in the Hamptons, in New York, L.A., etc.
We expand the charity to start giving scholarships in other cities. This should justify transit between these cities, so now it’s reasonable for the charity to own a private plane and hangar for transporting charity board members.
I want a vacation property in the Caribbean, so guess where the charity expands next? We give out a few grand of scholarships every year, and this justifies our flights to and from the vacation property that the charity owns.
All of these things cost money, don’t get me wrong. But since most of my money is being funneled through the charity, I’m able to enjoy these luxuries on what is essentially pre-tax income.
The charity is still doing good things, and when I die I’ll die with zero dollars in my bank account, but who cares? I’m dead and I can leave the charity to my kids.
Not a direct answer to this question, but charitable donations can also be used to “hide” the movement of money.
For example, let’s say I have a manufacturing business and want my company to be chosen for a lucrative government contract. I can’t directly pay the government official in charge to select my company, that would be a bribe. But let’s say that government officials wife sits on the board of a charitable organization and receives bonuses when the charity does particularly well. My company could make a large donation to the charity. This would provide income to the family of that government official to sway their opinion while also making my company look good.
I’m an accountant. I used to do the accounts of a charity which was an arts charity, which owned several large important paintings.
It was controlled by a very rich man, which I won’t name, who had donated these paintings and works of art to the charity for display.
Of course, for some period of the year, they were also at his house.
So he got the tax relief on the donation, but also broadly control of the works of of art.
The correct answers here aren’t exactly ELI5, so I’ll take a go at it.
For easy math, let’s say the tax rate is 10%. If you made $100, you would pay $10 in taxes. But there are two types of income: taxable and tax-exempt. What this means is you don’t get taxed on that entire $100. What you pay for health insurance is exempt, for example. Charitable donations are also tax-exempt, so if you donate $10 of your $100 to charity, you are only taxed on the remaining $90. People will often represent this as getting a tax break; using that same $10 charitable donation, people would say you got a $1 tax break because you only owe $9 after making the donation (10% of $90) instead of the full $10 you would owe if you hadn’t made the donation. You’ll notice that you still had to pay $10 to get that $1 less in taxes, so you’re right to question things
The complication comes in with tax brackets and types of income. Say I’m the CEO of ABC Inc. I get a salary of $100 from ABC and I get stocks from ABC. Now, the income tax is not a flat rate; let’s pretend that the brackets are 0% below $20, 5% for $20-$60, and 10% above $60. Stocks are also taxed separately from income, let’s say that’s a flat 2.5% rate.
So I make my $100 income and would owe $6 in taxes between the tax brackets. But I have personal loans and business expenses and other tax-exempt income, so on paper I only have $40 of taxable income. So I donate $20 of that $40 and keep the $20 that I owe nothing on. I still gave away $20, but that donation makes me look good which makes my company look good which makes my stock prices go up. I can sell some of my stock in ABC, making me $180 that is taxed at 2.5%. So overall I owe $4.50 on $240 in my pocket ($60 tax exempt + $20 at 0% tax + $180 from stocks). But wait! While my stock in ABC was profitable, I also had stock in XYZ that took a loss. I can claim those things, so on paper my taxable income from stocks was $0. I still have $280 in my pocket, but now owe nothing in taxes.
People in-general don’t understand tax laws (again, they are rather convoluted; even my examples aren’t perfect partly due to simplification) and certain individuals/media outlets take advantage of that to push untrue narratives; a politician might say I got a $6 tax break because of my donations and deductions, which is true as I owe $6 less in taxes than if I didn’t have those, but they’ll make it sound like the government gave me $6. Sometimes donations are made as genuine humanitarian efforts, sometimes they are made to help shift around tax burdens and manipulate gains/losses/taxable/non-taxable income totals. Some would say that I paid $0 income tax and that’s not fair (which is true, I paid zero income tax because I donated it all), and others would say the 2.5% tax rate on stocks isn’t fair when income tax is 10%.
The IRS is well aware of all of these scams. Private foundations are strictly prohibited from doing things which directly benefit donors. Donors get to attend fancy dress galas etc, but [rich person] could go out for an expensive dinner for a lot less. Donating to legitimate charities let’s rich people choose who their money benefits while paying taxes does not, but the donations just reduce the amount of income they have to pay taxes on it doesn’t directly reduce their tax liability.
Charitable donations don’t cut one’s taxes in absolute terms, nor does one save money overall by donating to charity. Basically, the amount of donation is deducted from taxable income, so they don’t pay taxes on the amount donated (provided their overall deductions are enough to itemize).
So say somebody donates $10,000 to a charity and is in the 35% marginal tax bracket (income between $432k – $648k for married couple). They would save $3500 on their taxes, so the donation would feel like $6500 instead of $10,000. Basically, they’re getting a discount on the donation. But their bank balance is still lower overall by $6500 vs. had they not given the money away.
You’ll need to acknowledge that there are gradations between “benevolently giving charity”, and “doing illegal things with your charity”.
Example: you can give money to a private school as charity. Maybe that school is really small. The only kids in it are your own kids. Still (probably) legal.
Example: you can give money to a charity. And that charity can (and should pay) its employees. Maybe the charity is run by your son. People who run organizations get paid well, so he should be paid well. Still (probably) legal.
If you think we should make either of these legal, I don’t disagree with you, but also remember to walk them back a little towards the benevolent side: what if your kids are 50%, or 10%, of the students in a school? What if your son isn’t the CEO, but some other lower role in this charity?
And, to be honest, we all do this too. I give money to non-profits that I then benefit from: synagogues I pray in, sports leagues I play in, political movements that would benefit me financially if it were successful. It’s not fraud to give charity to things that benefit me, and to avoid taxes through it. But it’s something we should be aware is happening when the richest Americans do it to avoid keeping our government afloat.
Short answer: they don’t. The wealthy *do* donate a lot to various charities, but it doesn’t help them much come tax time. A lot of people hear “tax write-off” and think that means the taxes are reduced by the amount donated, which isn’t how that works. At all. What actually happens in the taxable income is reduced, which does reduce the taxes owed, but not by anywhere near as much as people think it does.
For example, let’s say I made $10 million last year, after all deductions. I would owe $3,655,208 in federal taxes. Now, let’s say I donated $2 million to charity. That doesn’t reduce my taxes by $2 million, that reduced my taxable income by $2 million, meaning now I’m only taxed on $8 million. That still comes out to $2,915,208, saving me $740,000 in taxes. But I’m still down the $2 million I gave to charity.
So where I had $6,344,792 left over after taxes before donation, I now have $5,084,792 left over and a charity has $2 million.
So why do the wealthy do it? Because contrary to what people like to soapbox about, the wealthy aren’t *all* a bunch of heartless bastards, that’s why. And even some of them that *are* still do it for public image.
People get mad when they own the charity they’re donating to.
For example, Elon Musk donates to the Musk Foundation, which Musk is in charge of and who’s mission is to give grants for space exploration. Sometimes this means giving money directly to SpaceX, or it’s partners, or it’s researchers, at a preferable tax rate.
There’s several different ways. A very notable example was when Donald Trump used money from his foundation to buy a painting of himself that he hung in his office. Donald Trump donates a million dollars (or whatever it was) to the Donald Trump Foundation, which then uses that money to buy something that Donald Trump wanted. *Technically* Donald Trump doesn’t own the painting, his charity does, but what difference does it make?
Billionaires will also donate money to charities that they own and control that have large endowments. The money in the endowment can be invested, and frequently is. Also money in that charity can be spent in all kinds of ways that could technically qualify as charity work, but aren’t really. Let’s say a billionaire has their own charity that’s really for environmental causes. Every time that billionaire flies to a tropical island on their private jet, they can charge it to the charity. They can claim they’re visiting the island on the charity’s behalf to see the local wildlife population.
Also they’ll overvalue certain assets to give themselves a bigger charitable tax break. They donate a painting to be auctioned off at a charity. Who says what the actual worth of that painting is? All you need is an appraiser to say it could be worth $100 million and now you can write off that amount on your taxes.
These are somewhat egregious examples; the reality is slightly more subtle usually, but hopefully this gives you an idea.
Often the charity is an organization they control/own and does minimal charitable work.
However, there are many ways they can use the charity to give family/friends jobs, or curry favor, award contracts for work on behalf of the organiation, or hold fancy events and take trips in the name of the non profit as part of their mission.