#TaxDeductions #CharitableGiving #TaxBenefits #DonationImpact
🌟 **Understanding the why behind tax-deductible donations** 🌟
Key reasons for donating to charity for tax benefits
1. **Financial Incentives**: Many individuals choose to donate to charities to lower their taxable income and ultimately reduce their tax liability. By deducting their charitable contributions from their taxable income, they can potentially lower the amount of taxes they owe to the government.
2. **Philanthropic Intentions**: While tax benefits may play a role in the decision to donate to charity, many people also genuinely want to make a positive impact on society. By supporting causes they care about, individuals contribute to the greater good and support meaningful initiatives that benefit others.
Real-life example: John’s motivation for charitable giving
Imagine John, a successful business owner, who is passionate about helping underprivileged children receive quality education. John decides to donate a significant amount to a nonprofit organization that focuses on providing educational opportunities to disadvantaged youth.
On one hand, John is motivated by the ability to claim a tax deduction for his donation, reducing his overall tax liability. But on the other hand, he is deeply moved by the impact his contribution can have on improving the lives of students in need.
The impact of tax-deductible donations
– **Supporting worthwhile causes**: By incentivizing charitable giving through tax benefits, more individuals are encouraged to donate to worthy causes that address important societal issues.
– **Boosting charitable contributions**: Tax deductions can serve as a powerful tool to increase the overall amount of donations received by charitable organizations, allowing them to expand their reach and impact.
In conclusion
While the motivation to donate to charity for tax benefits is valid, it often goes hand in hand with a genuine desire to make a positive difference in the world. By leveraging tax deductions for charitable contributions, individuals not only reduce their tax liability but also contribute to meaningful causes that help create a better future for everyone. Remember, every donation, big or small, makes a difference! 🌍💙
Let’s continue spreading kindness and making a positive impact through charitable giving! 🌟🤝 #MakeADifference #PayItForward
You don’t donate to charity *just* for the tax benefit. You donate to charity and the government subsidizes some of it.
People have causes they believe in. It’s not always a strictly math decision.
They wouldn’t, it’s just a common misunderstanding.
Ultimately donating $1 to charity makes you poorer, it’s not an infinite money glitch. Maybe not $1 poorer, but poorer.
However as a caveat, the ultra wealthy create their own charities where they hire friends/family, among other nonsense. So they can evade taxes more effectively than us normies — but still, they lose wealth by donating.
“Oh damn, there’s a cause I care about…I should donate…but I dunno…”
“Oh wait, I can get a tax deduction for that? Well now I’m def gonna do it!”
Look up: incentivizing
Donating to charity results in less money in your pocket. That said, if high earners give them $1, the charity gets to keep $1, where the high earner would only keep maybe 60 cents if they kept it themselves. Still, 60 cents is more than zero.
The shenanigans come in when the charity isn’t really a charity and the rich person controls it.
You don’t make money by giving to charity, but the tax deductions can make your money go farther for any given sacrifice of post-tax money. You can basically give like 40% more money than without the deduction.
Another trick is to donate appreciated shares. Then you can write off the full market value and avoid paying capital gains tax. It’s not unusual to be able to give $100 where you’d only be able to keep $50.
You’ll never get rich giving money away, but if you want to be charitable, the tax advantages of giving smartly can be pretty significant.
>Let’s say you make 500,000. You’re taxed 25%. You have $375,000.
>You make 500,000. You donate 50,000. You now only have 450,000. You pay taxes on that and get 337500.
where did you get the 337500 number from? I’m assuming you got it from the 25% tax, yes?
what you’re missing is the tax % is not a flat %, for simple math let’s say it’s something like
$0-50k = 10%
50k-100k = 20%
100-150k = 30%
150-200k = 40%
so if you make let’s say $180k, between $150-180k that $30k the gov taxes you 40% = you will only see $18k in your bank account out of that $30k
now if you reduce your taxable income by $30k by let’s say donation, you still give out $30k but that ‘costed’ you $18k not $30k
Sometimes people donate specifically because they are on the edge of an income boundary for Medicare premiums. You can see here even going over by $1 certain income limits can increase your monthly premium significantly. A qualified donation could keep you under the limit.
https://www.ssa.gov/benefits/medicare/medicare-premiums.html
It probably doesn’t explain your examples where someone makes far more than these limits and this doesn’t matter.
As others have said, you don’t donate for the write off. However, if you plan to make donations over multiple years you may decide to accelerate that and donate all in one year to ensure you itemize and can take the deduction on one of the years. Otherwise, depending on your situation you may be under the itemization limit (thanks to the SALT limit) each year.
This is common in planned giving. The charities would prefer to take it per year over multiple years but many donors insist they give at once.
By inflating the value of whatever is being donated.
For example: suppose you buy a piece of forest land, intending to build your mansion on it someday. A few years later, the county decides that the land cannot be developed, significantly decreasing its value. Instead of selling it, you decide to donate it to a conservation organization. How much of a deduction do you get? Depends on how much the land is worth, which is somewhat subjective. If you’re willing to egregiously inflate the value and hope you don’t get audited, you would make a lot more from the deduction offsetting your “donation” than you would’ve made selling it at a loss.
A lot of wealthy people use it to not only lower their taxable income but give it to a charity they or their family/friends control that can advance causes that they care about. Sometimes they’re noble goals like curing diseases or helping feed people. Often times, the charities just advocating for things that will make it overall better for people like themselves. Sometimes by advocating for an industry to be invested in or deregulated. Sometimes for things to make it easier for them to expand into an existing market.
Find the video series on YT about Charitable Remainder Trusts and you can learn about how the wealthy can pay lawyers to effectively annuitize capital gains in convoluted ways that will make your head spin while minimizing the tax burden.
E: I probably fail the prompt, unless you imagine a very precocious 5 year old that loves arcane estate planning lectures. E2: Which would honestly probably be better for them then about 80% of the things 5 year olds do watch on YT.
Without ascribing fraud or bad intent, for tech billionaires the arithmetic is compelling:
For ease of understanding let’s just say that state and federal taxes add up to 50% of gain.
Now some tech entrepreneur invests $100,000 nothing in a startup. Stock goes up thousand fold. It’s now worth $100 million. If he sells, she owes $49,950,000 in taxes. Gets to keep just over $50m after taxes.
Instead he donates $50m, and get a tax write off for $50m. Sells other $50m and the donation nets off the gain. Still keeps $50m, but has given to a charity she likes or controls a whopping $50m.
If the stock went up a 100 instead of thousand times, it’s a similar outcome. Basically, your cash cost of whopping charitable donations is very small. And it gives a social standing, a local rep, and if the charity is controlled he/she can direct it in whatever way they want. They get feted at charitable balls, get buildings named after them, kids go to ivy leagues thanks to donations, and so on
Now even if
The main thing is that it boosts the impact of your gift to the charity. Yes, it only makes sense if you were donating anyway IMO.
Qualified Charitable Distributions (QCDs) lower your gross income dollar for dollar and are an effective way to reduce your tax liability for those in RMD age
CRUTs are also a great way to diversify highly concentrated stock positions (usually from RSUs) while getting a present value deduction and generating a stream of income along the way.
DAFs are a nice way to be charitable and you get a tax benefit from it
When it comes to big corporations those charity drives where they ask you to round up to the next dollar is their tax write off. You and 100 million other people gave about 50 cents to charity while they claimed a 50 million dollar tax write off.
Keep in mind donations are not just cash. For example, if Nike were to donate 10,000 pairs of shoes they could write off the retail value of 10,000 pairs of shoes which is many times more than it actually cost to make them.
You either give them money to charity or to the government with taxes. Easy choice I’d think
I had to send one kid to a special private school for a couple of years (special needs).
They charged tuition that covered 80% or so of the school expenses.
They then did a fund raiser to get the other 20%. They were non profit so any donations were tax deductible. Wink wink nod nod Bob’s your uncle. Kinda unwritten expectation you (of your friends/family) cover that 20%. But it was tax deductible. Some people could not cover it and other covered more. Plus they also got true donations.
So every dollar I paid, cough, I mean donated returned to me 20cents in tax savings. Or in other words I paid 80 cents and Uncle Sam paid the other 20 cents.
It is like how some museums are free but then have a recommended donation = entrance fee. Basically allows you to count the entrance fee as a donation.
Another way this works is if say a charity does a Gala Event and sells tickets for $1K. If the meal is worth $50 then $950 of the cost is a donation and counts as a write off. Rich people go to these things to network and that is why they pay the $1K. But now they get even more value from it so good chance they attend more, increase their donor level, etc.
In NY, if your family makes 125k or less, your kids can go to SUNY colleges for free. If your household is close to that cusp, it’s beneficial to lower that number by contributing first to your retirement accounts fully, then to consider charitable donations.
We do this because we believe our kids should ave the choice of whether or not to go to college without having the burden of diminishing our already precarious retirement.
We are a first-gen family stuck in that middle class conundrum (make too-much-too-little).
This is a 1% move that may actually help us. (Edit: that’s not to say we don’t save for our kids – we do! Just not at the rate I’ve seen some of y’all. Also, we haven’t tried the donation part yet, so I don’t know what the itemization cutoff is)
Where I’m from, we get 2.5 to 3 times tax deduction for charitable donations. So a $100 donation can reduce my taxable income by $300
Nobody really does this. What they do more of is maximizing the possible benefit of their giving. Giving in highly-appreciated securities is a good way to harvest more tax benefits, and methods like Donor Advised Funds allow you to turn that into giftable cash later.
When I’ve come across this it’s because the individual didn’t know the difference between a tax credit and a tax deduction. They thought that if they donated $1,000 then they paid $1,000 less in taxes.
If it’s a company, it’s not usually “just” for tax purposes. It’s often more like a type of advertisin that’s tax-deductible, “Look how non-evil of a corporation we are”. Often using other people’s money instead of their own.
If it’s a person, they might be giving to a “charity” that they believe in or even benefit from. If you and all of your rich friends can get together and create a nonprofit golf course, then you can all save money by charging less than market rate for golf fees but make it up with tax-deductible donations on the back end.
You donate to charity not for the tax benefit but for what the charity does for you, and the government subsidizes it for you. You donate to the church? You support a community of like minded people. You donate to schools, maybe this supports like minded thought. You donate to a charity? Maybe a relative has a kushy job at that charity and it supports your social life by throwing parties and events andost of the “donations” are funneled to those purposes.
Maybe you donate to non-profit organizations that spend a lot on political advocacy, so you can effectively spend more on politics.
There were past schemes where people could donate just to lower their tax liability, but the worst ones are believed to be closed now.
For example, a rich person could donate rare artwork or real estate that was hard to value, get the receiving organization to state a very high value for it, and then get a large tax write off. Sometimes they could make a net “profit” by working this system, getting assets for a relatively low price, donating the assets, and deducting a very inflated amount from their taxes.
Those loopholes are generally believed to be closed by new rules, such a formal appraisal now being required for the above example.
Could also just be reverse causality.
I’d very surprised if a lot of it didn’t start like this
I donate money towards a charity that I care about because I a) care b) want to get social credit. So let me also buy off a few members of congress who will put forth legislation to make my donations tax deductible.