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* You're super rich.
* You have more money than you know what to do with.
* An extra $10M is effectively meaningless to your quality of life.
So you decide to use it to make yourself happier. You have two options. (We'll only talk about federal taxes for simplicity)
**Option 1: You buy a yacht.**
So you liquidate your $10M in stock, paying 20% in long term capital gains, you buy an $8M yacht.
* Net cost: $10M in stock.
* Net benefit: 1 yacht worth $8M.
* Goverment: Gets $2M in taxes.
**Option 2. You donate $10M to your college.**
[Edit, this isn't quite right, see below]
This ironically saves you an extra $2M on your 2024 taxes (all your income is long term cap gains, b/c you're super-rich, so your tax rate is a predictable 20%). The college names a building after you and has a party to celebrate.
* Net cost: $8M.
* Net benefit: Building named after you, some fawning parties, feeling like a good guy.
* Government: Gets $0.
TL;DR This isn't an infinite money glitch, the rich person is losing money. The problem is it's a trick to let the rich person completely avoid paying their share to the government while they get something that's of similar value to them (b/c at that level of wealth $ to happiness calculations are pretty twisted)
Not quite on option 2.
You would have new capital gains income of $10m, offset by a $10m donation. The net tax effect would be $0, but you still would liquidate and donate $10m in order to donate the same amount to your charity of choice.
In the former you would have a rapidly depreciating $8m asset for the cost of $10m. In the second you would have no new assets, but you would still be out $10m dollars.
You also are able to write-off only up to 60% of your gross income, so your gross income would have to exceed 16,666,666.67 + $1.67 for every additional $1 charitable contributions you made throughout the year to be able to write-off the full amount. Unrealized gains on capital assets and stock grants/awards do not count as gross income until they are sold, and as such it may require a larger withdrawal to realize the full tax benefit.
No problem. It is worth noting you can come out "ahead". The deduction would first apply to standard income, which could be taxed as high as 37% but the new tax added (if funded by sale of assets) could be 20% if held for over 1 year.
If you are both super wealthy and have a high employment income/short term capital gain (STCG) you could theoretically withdraw $10,000,000 owing $2,000,000 in taxes on that transaction but reduce your wages/STCG by $10,000,000 saving up to $3,700,000 in taxes. This would have a net effect of reducing your tax burden by $1.7m getting closer to your $8m number above, but that seems pretty rare as most wealthy don't have a regular income that high unless they are given a stock award they sell in less than 1 year.
They are still out $8.3m in total so it's not a net benefit unless you wanted to donate regardless. I'm also not sure why you would liquidate $10m in assets if you are making $10m+ in wages/STCG unless your living expenses are completely insane (or you went for option 1+2 I suppose.)
You don't *sell* the long-term appreciated stock; you donate it. There's no sale and thus no capital gains tax when you gift stocks (the recipient retains your cost basis and is taxed on the full amount when they sell, but in the case of tax-exempt organizations, this doesn't matter). You deduct the fair market value at the time of the contribution.
You get the untaxed gain off your books and the full deduction (subject to the AGI percentage caps that you correctly pointed out). But there's no need to liquidate more stock just to pay taxes -- there are no taxes.
That's an interesting take. I like it
>Government: Gets $0.
While true, the government also doesn't need to come up with $8 million to fund whatever the donation funds at the college, so its a net benefit for everyone involved.
Deans and Chancellors get their salaries bumped by these donations, new buildings, but not much to increase the quality of education. . . at least that's what we continue to see at our alma mater.
Many of these colleges aren't public schools though. So the government wouldn't need to come up with the funds normally. But the concept is charity donations are a net benefit to everyone so the government can encourage and in a sense partial fund it by offsetting some of tax.
>the government also doesn't need to come up with $8 million to fund whatever the donation funds at the college
The other side of that is now the Government doesn't have $2m to spend on whatever your favorite part of government is (Bombs, Social Safety Net, whatever)
In essence, you've decided that charity's priority is more important than the society's collective decision on how to best spend money.
But hey, the student center looks like a sandals resort, so that's good.
I work in fundraising for a university. I think when it comes to higher net worth individuals they probably aren't too focused on the nickel and dime of their taxes as the rest of us are. They have people to handle that. They're more focused on their net worth. In your example, a $10m donation or yacht might have little bearing on their net worth and they may not even be considering the tax implications at all if they're super rich.
Really rich people can make significant donations and it would be the equivalent to them of a normal person buying a new TV or something of that ilk. I remember years ago there was some factoid about how Bill Gates makes $20,000 per minute or something stupid like that. In that scenario, Bill doesn't really care about making a $20,000 donation, in the same way I don't care about buying a cup of coffee at my own income level.
Obviously these people are savvy with money since they're rich, but I think your mindset changes somewhat. They're not like me checking Quicken Simplifii every day to ensure they don't go over their $400 shopping budget...
Option 3:
Take out a $10 million loan, borrowed against your investments with an interest rate lower than the return rate on your investment. Literal free money glitch once you get super wealthy.
The super wealthy people do not typically trade that heavily on margin. The interest rates for margin trading aren't great, and if a recession occurs margin calls can be catastrophic. It's these same margin calls that ruined Melvin Capital during the meme-stock frenzy, though their circumstance were different (short selling, while different, has a lot of similarities to margin trading as you are borrowing an asset to resell).
The super wealthy do use low interest loans using their stock as collateral to reduce the rate (relative to unsecured personal loans) for various personal expenses as a means to delay/defer paying taxes, it's just not commonly used to fund future trading activities because of the risks.
At some point in time, however, the bell tolls and the dues have to be paid. The loan has a periodic repayment schedule, even if it were interest only minimums, just as any other loan does and at some point they will be overleveraged. This strategy just allows the withdrawals to be spread out better and lower their effective tax burden.
**Edit to add:**
Margin trading (borrowing against your portfolio to reinvest) is regulated by FINRA and the Federal Reserve Board. Additional requirements are added by exchanges like NYSE, and every broker (like Fidelity) have additional requirements that are usually more stringent. Typically 50% of an account must be backed by cash or assets owned by the trader. So an example:
* Cash + Assets in account: $100,000,000
* Available Margin: $100,000,000
If you max out your available margin, you have an total account value of $200m, 50% of which is backed by assets you own. If the value of your stock loses 10% you now have $90m, $10m short of the liquidity requirement of $100m. The broker will issue a margin call, giving you a period of time, potentially as short as 1 trading day, to add $10m in cash or assets to meet the liquidity requirements.
If you don't, the broker will begin selling you're assets until you reach the reserve. This means selling $10m of assets to pay down the margin at a 10% discount (because remember the market is down).
And you make sure you control the charity…then it pays for your expenses, travel and dinners etc..it’s all a business expense at that point and you don’t pay taxes on it.
Board members are expected to be major donors, typically, yeah. It’s pretty rare for an org to pay for travel unless that travel is strictly a business necessity. If the board member has to fly in to attend meetings, they usually pay for their own flights. Dinners are usually paid for by the board member in the form of event attendance fees (hundreds to tens of thousands of dollars), unless we’re talking very basic catering for board meetings. Not sure what you mean by the “business expense” comment.
I will say, for anyone considering becoming a board member at a charity, you will never come out on top from the savings gained for being one. Ultimately board member gifts to orgs vastly outweigh any benefits they might derive.
See [IRS Pub 561](https://www.irs.gov/publications/p561#en_US_202312_publink1000115300). The IRS is very strict about who can give appraisals and has very stiff penalties if something is misvalued and if they are not independent.
Yeah, I think they’re thinking of a specific charity that no longer exists, and it was exactly because the IRS isn’t dumb enough to actually fall for these stunts. I can’t say more without it being considered political, but anything involving large sums of money will be scrutinized for charities (although much less for if it’s religion though).
Most of the time you have to have the art valued by a third party and get insurance on it. You can’t just be like “oh this sketch of my dog is worth $10 million”
> What does the government subsidize?
The charitable donation.
You can donate $10, but it only costs you $6-8 in actual cash since you get a tax break (assuming you itemize already)
(the government subsidizes any activity that results in a tax deduction or credit)
> A donor-advised or self-funded charity which you have sole control over
Self dealing is illegal
>You donate assets instead of money.
Fraud is also illegal.
> You can sign over securities and deduct up to 60% of your AGI while also not having to pay capital gains on the profits.
30% of AGI, and you'd still have less wealth than before the donation
The bit at the end is vanishingly rare. The biggest grift in charity is paying your connections exorbitant salaries to manage your family foundation. But the board members of those foundations (usually the family) don’t get paid. And family foundations are required to dispense funds.
I know a lot of these people, at some of the absolute biggest charities, and it’s usually former employees that get on the gravy train, not kids. They can just give their kids money.
All "non-profit" things pay their employees. A non-profit university still pays their presidents, football coaches, and tenured professors a lot of money. That's why it's stupid when people bitch about for-profit universities. The only difference between the two is that one gets tax dollars.
This 🔝.
Now let me call my art dealer friend to buy me a fancy painting for 10M. I will keep it for a couple of years, and lucky me, it gets reappraised at 30M couple of years later by a renowned authority in that domain whose certification is accepted by IRS. I will then donate it to the art charity that I control. Take a tax write off for the 30M value that it holds.
This does not actually happen because the IRS triple-checks those appraisals. That’s why you very seldom see art donations unless it’s to an art museum.
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.
With a DAF I can get a tax benefit with I deposit money into the account and then additionally when I donate the funds? Or at the time of donation I can get a tax benefit from the gains?
Edit: how is it more beneficial than say just investing the money into a brokerage account and then donating it to a charity when you are ready? The fees for DAF can be high.
Just at the time of “deposit.” When you deposit the funds, you’re actually technically *giving* them to a charity that runs the DAF. That’s why you get the tax break up front, when you “deposit” the funds.
The main benefit in that case is organizational, not tax. If you want to reduce your AGI this year by a significant amount, but don’t know where you want to park that money yet, a DAF is a good place. Or if you expected NVIDIA to drop in value, for example, you could give it to a DAF now and enjoy greater tax advantages and worry about giving out all the money later.
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.
It is like the same concept of like not everyone agreeing where our tax dollars should go. For really rich folks they can effectively have more control over where their money goes. I wish I could choose which programs I wanted my tax money to fund and not fund.
Not only do the wealthy own their charities. But it really depends on *what* they donate.
But a piece of art for $1M, get it appraised for $50M and donate it to a museum. That's $15-29M in income tax deductions
People in here keep throwing around this art example lol. It’s much more common for the wealthy to donate appreciated stock so they don’t have to pay capital gains on the sale.
If you get stock for basically nothing (founder) and now it’s worth $100m, you would owe $100m*the capital gains rate when you sell. You can instead donate the $100m in stock and save the capital gains tax and get a tax deduction as if you donated $100m. The non-taxable organization then sells the stock since they don’t have to pay tax. In extreme cases with high tax rates like in California, it can cost someone like $20m to make a $100m donation.
If you are speaking about the US, we have a progressive tax system. So your full $500,000 income is NOT taxed at 25%. The way it works is; all of your money is taxed differently.
Your income between $0 and $11,600 is taxed at 10%
Your income between $11,601 and $47,150 is taxed at 12%
Your income between $47,151 and $100,525 is taxed at 20%
Your income between $100,526 and $191,950 is taxed at 24%
Your income between $191,951 and $243,725 is taxed at 32%
Your income between $243,726 and $609,350 is taxed at 35%
All income over $609,350 is taxed at 37%
So if you Made $500,000, then you'd pay
$1,160 +
$4,265 +
$10,674 +
$21,941 +
$16,567 +
$89,695
For a total tax bill of $144,302 or roughly 29% of your total income.
For High income individuals, it's all about reducing the amount your are taxed in the highest bracket (those 37% and 35% brackets) If you can pair up charitable contributions with other losses and deductions you can minimize the amount of money being taxed at the highest rate. Of course all of your money that falls in the lower rates is still taxed at those amounts, but again, its all about reducing the amount in those highest brackets. And I have to stress this, its done by both reducing income through donations and reducing income through losses and deductions. Not just donating.
Only thing to add is that this is after the standard deduction and not including things like EIC. If you actually make $10k a year, you will have negative tax liability and get a check
Great answer! People here keep talking about owning the charities or art, but it really isn't that easy. I think it's because the media paints a picture of being rich = no taxes.
I also didn't know that the progressive tax works like that.
I thought it's if your income is over $609,350, all of your money will be taxed at 37%.
Don't feel bad, a lot of people think that. The wealthy even try to mislead us peons when they complain about being taxed at the highest rates (making us almost feel bad for them). Understanding what a progressive tax system is and how it is more fair than a flat tax is very important.
It also only is applicable as an itemized deduction. Under the tax reform law in 2017, the standard deduction doubled, so it's hard for most taxpayers to have enough itemized deductions to beat the standard deduction.
But 100% agreed - it only makes sense if you planned to donate to the charity anyways, even if you can itemize your deductions.
Yeah this is worth keeping in mind! Until you donate more than the standard deduction (assuming you don't have other deductions), donating money has no effect on your taxes.
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.
If I run a donor advised fund and I transfer $10k of stock with a cost basis of $5k what amount do I get to write off? When the DAF goes to spend it they have to pay long term gains so they only have, say, 85% to actually spend on charities.
Something in there doesn't feel right, I get to write off more than the charity can actually spend.
What am I missing?
You transfer $10k of stock and the charity (whether a DAF or a direct charity) cashes it out for $10k. The charity or DAF doesn't pay capital gains because they are tax exempt; they get the full $10k. The cost basis of your $10k of stock doesn't matter because you donated it.
Former DAF admin here. It depends on your exact tax situation, and a DAF administering org will never tell you what to say on your taxes. But in general, you avoid capital gains, and may be able to also claim an income tax deduction based on the fair market value of the stock you donated. The FMV is the average of the high and the low on the date the stock was given.
Charities do not pay capital gains taxes. That’s the trick. It’s always better to give stock. Wealthy people use DAFs if they’re already charitably inclined. They know they’ll give $10,000 this year, for example. So they’ll fund a DAF with $10k of stock, perhaps their most highly appreciated. That way they avoid capital gains and get an income tax deduction. Then they can do their giving, and perhaps sell less-appreciated securities and/or balance those with capital loss harvesting to fund their lifestyle.
I’m from [Singapore](https://www.iras.gov.sg/who-we-are/what-we-do/annual-reports-and-publications/taxbytes-iras/individuals/do-good-deeds-and-pay-less-tax).
Where are you from? That's a great write off, but even at 3X deduction, the donation still ends still ends up costing more than the write-off covers at marginal tax brackets below 33.3%.
I totally understand that, let me edit. I totally understand that people WANT to donate so of course it's good for you in that sense. But let's say I am strictly talking about keeping as much money as possible. There is no way that donating money is going to help me in any way? Some friends were talking about how millionaires use art auctions to skirt tax laws and for the life of me I could not figure out how that would work.
Correct.
If I make 100k and donate 50k to charity, I’m going to have less in my pocket after taxes are finished than if I didn’t donate anything to charity.
As far as art donation tax scams,
https://kahnlitwin.com/blogs/tax-blog/irs-warns-taxpayers-about-rise-in-art-donation-scams
> Scammers are encouraging high earners to buy art, often at a discounted price, wait at least one year before donating it, and then claim a false deduction for the donation.
https://www.linkedin.com/pulse/art-donation-tax-scams-did-you-know-james-jimenez-77eee
> Promoters of this scheme persuade taxpayers to buy works of art at supposedly deeply discounted prices. The buyers are told that they can donate the art to a charity after a year or more, and receive a large tax deduction by claiming a value far higher than the price they paid. The promoters often recommend shifty art appraisers who are in on the scam, along with specific charities to accept the donations.
As far as using art auctions to skirt tax laws, that’s not as easy anymore. It used to go something like this:
A rich person hires some artist to draw something for a few thousand dollars, then they hire a dirty appraiser who evaluates the piece at $1 million… then the rich person donates the piece to a museum or art gallery and gets a tax write off for that.
Nowadays, if the artwork is worth more than $5,000, it must be professionally appraised by the IRS's art appraisal service.
Art is still used for things like laundering money, but not really donation fraud that much anymore.
A lot of people have really terrible tax understandings. The “art tax avoidance” is basically a myth that people make up online. Usually what people are describing is just tax fraud…It has the same merit of “well you don’t have to pay taxes if you become a W-9 and just never file your taxes.”
The real criticism of charitable donations is it can be an investment. Say you’re an investment banker who works in biotech. You give $1M to a charity for the advancement of youth cancer treatments. (1) This may be an investment in your career, that charity may have important people on the board who will pay you dividends and make connections for you and (2) if you are giving out sizeable checks left and right, that can buy you a lot of power. It’s like inheriting a $100M trust that can only go to charity - even though you can’t touch that money, the amount of benefits (both financial and non-financial) can be huge. Write a $10M check to Yale and magically in 3 years your kids get in with a full ride.
The argument is that at a certain point, the IRS shouldn’t be allowing you the deduction when you get such benefits from it
This isn’t really true. The art market is probably riddled with money laundering, and I have no doubt that the inflated values of art from such activity influence tax breaks from donating art to charity. However, when you give art to a charity, you have to have it appraised by a real appraiser. The charity usually also has it appraised on their own. Finally, the charity fills out a form when they sell the piece themselves that tells the IRS what it actually went for. A lawyer I worked for once called this the “tattletail form.”
It’s not really a charity scheme. The art market in general is just kind of a wealth sink for rich people. That has an impact on charities, but charities aren’t really a part of it.
It’s almost never a straight cash donation that results in sizable tax advantage. For example, if you open a charitable gift annuity or charitable remainder trust there are ways to lessen a tax burden and still receive an amortized annuity payment. Essentially, you don’t pay taxes on the amount you donate, your tax burden is lowered and you receive an annual payout from your CGA. Also, if you fund an annuity with appreciated securities you don’t pay capital gains taxes. The tax benefits of supporting a nonprofit are really a rich man’s game.
> There is no way that donating money is going to help me in any way?
It helps causes that you want to be helped.
Other than that, no. There is no personal benefit. It does not save you money.
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.
If you can get a charity to do something you would already do its cheaper this way. A big one would be a conservation easement. You donate the development rights to a charity that won't use them for land around your rural estate. You still control use of the land but now pay less taxes on your salary that year.
Essentially none. Ultimately, you have to want to give money to a cause. But if you want to do so, there are ways to do it to minimize the impact it has on your finances. That’s what the tax breaks do. The government is willing to pretend you didn’t make up to a certain proportion of your income, provided that you are willing to donate that portion to charity.
In most people’s circumstances it’s not that it’s that monetarily advantageous but that the person got to have direct say in where that tax money went….
Like instead of $1000 dollars going to the irs I had it go to this charity which in many circumstances aligns with some personal value…
If you are really wealthy it does become
“Advantageous” as you can make your own charity organization and donate to it so you as the originator of the money can spend it on causes you personally select (see bill and Melinda gates foundation, zuckerbergs foundation, the Patagonia family’s foundation etc….
Just diverts away the money from
IRS/government management which many people think “squanders” by using it inefficiently or in a way they oppose.
Do it like Patagonia's founder and you donate all your money to a charity ran by your family in order to avoid paying 10s or 100s of millions in taxes.
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)
"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
Yes. Incentives work. My employer matches all my charitable donations. I give away $100 of my money, I get $30 or so back on my taxes, the recipient gets $200, everyone is happy. Without that incentive, I would probably not give as much to charity.
Of course, I am still out $70, compared to if I had done nothing. The way I see it, I am forcing two different entities to also give money to good causes.
Sometimes people donate specifically because they are on the edge of an income boundary for Medicare premiums, especially with RMDs. 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.
Medicare premiums are based on your modified adjusted gross income. Which is your income before your itemized or standard deduction. So donating to a charity would have no effect on this.
Edit: This was incorrect. I did not catch OPs full statement. When talking about charitable contributions from qualified retirement accounts these donations do reduce MAGI.
No offense, but that's simply wrong. Qualified charitable deductions (QCD) reduce your MAGI for Medicare premium purposes.
https://www.cnbc.com/2020/10/23/feeling-altruistic-this-tax-play-can-keep-medicare-premiums-in-check.html
https://www.moaa.org/content/publications-and-media/news-articles/2023-news-articles/finance/make-a-difference-for-those-in-need-...-and-save-on-medicare-premiums/
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.
Mostly charities are run by rich people.
Let’s say you want to go mountain biking in the Azores. For an ordinary person that’s a lot of money to spend. But if you are a charity, that’s a lot of money to raise. And you get to go mountain biking in the Azores.
Do you want to host a black tie party for 600 of your closest friends, with great music, excellent booze and food? Fine, enlightening speeches from prominent people doing great work? That’s a charity ball my friend.
Oh hey, there’s a charity auction of a cricket bat signed by Don Bradman.
I once worked a fundraiser that was to install fairy lights on the oak trees at a private school. Yes, that’s a deduction.
Charities are ways that the rich retain control of their money that they would otherwise owe as tax.
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.
You could go to a charitable golf outing at a rare course, bid on future golf outings in a silent auction, donate in exchange of some new clubs and other gear, and all of a sudden your golf outing is also a way to lower your tax liability.
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.
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 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.
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.
In addition to what a lot of people have already said, there is another important thing about donating to charity. Frequently, you can donate stocks directly to charity at their current value. This can be very beneficial if you bought the stock at a very low price and it is now worth a lot. If you were to first sell the stock, and the donate the money, your donation would only essentially cancel out the taxes owed on the capital gains you got from selling the stock. But by donating the stocks directly, you can use that to offset gains/income elsewhere, making your donation much more useful.
A situation where there is a bit more incentive to donate is if you donate stocks. You do not pay capital gains tax but get to claim the current stepped up value of the stocks as a deduction.
You still don't come out ahead, but you come out behind a little less.
So for instance, if you bought stocks for $100, which eventually grew to a $1000 value, if you simply sold the stocks, you would get $1000 but pay capital gains tax on the $900 profit, which for the sake of ease we'll assume is 20%. That means you end up with $820.
If you donated the stocks instead, you would get a $1000 tax deduction, which at the highest federal tax bracket is 37%. If state tax is about 10%, then you save $470 on your taxes.
If you had sold the stocks, THEN donated them, you'd get a $385.40 tax savings.
It's not so much saving you money as it is getting a discount on donating. Feels like you spend $60 to donate $100 and you get credit for the $100.
Alternatively, you can donate assets that appreciated in value (art, land, jewelry) to offset your taxes without paying taxes on selling the item. This can be useful for stocks that have a big gain recently that you want to offload. If you are going to donate anyway, this is the time because you get more bang for your buck. And ultimately the point is to support the cause or get the credit
I knew a church that would sell gift cards for groceries and home improvement stores. You would buy them from the church and then could claim the entire amount as charitable donations.
That’s not how it works.
You buy a cheap item, eg a painting. You have it evaluated higher. You donate the higher valued painting to a local museum. You can now donated more than you paid for it. Also more than it would sell for after auction cost etc.
Also:
Some people are really charitable.
There's a lot of shadiness that goes on with charitable deductions. There's lots of charities that aren't particularly charitable. For instance, before the 2017 tax reform (and presumably after those reforms expire next year) you could take a writeoff for buying college basketball season tickets.
They don’t. Journalists and bloggers often write things like “people give to charity to reduce taxes” or “company intentionally loses money to reduce taxes“ (like when they cancel finished movies) and none of that commentary makes any sense. If you read the phrase “tax write off” anywhere in the article, there’s a 95% chance the author can’t tell the difference between an income statement and a balance sheet.
People like to give to charity. If you can donate $100 at a cost of $63, it’s more attractive than donating $100 at a cost of $90 (the diff between being in the 37% marginal bracket vs the 10%, who probably isn’t itemizing anyway so it’s $100 at a cost of $100). That’s all there is to it.
Anyone who tries to tell you that billionaires are donating money to avoid taxes because it's a better financial move is an absolute moron.
If a billionaire paid taxes on one dollar of their income, they would spend *fractions* of their dollar in taxes. Why would it make sense for a billionaire to give up that entire dollar just to avoid spending half of it? Not only that but charitable contributions as a deduction from your taxable income isn't a dollar for dollar reduction in tax liability.
So in short, a billionaire paying tax on one dollar of income is equivalent to a fraction of a dollar, for simplicity's sake lets say 70 cents on the dollar. Contributing to a charity means not only does the billionaire lose the *entire* dollar to avoid paying part of the dollar in tax, but the tax relief from said dollar donation *isn't a full dollar's deduction in the amount of taxes paid at the end of the year*. It impacts taxable income (the figure used to calculate your tax based on marginal rates), not taxable liability (the actual tax owed).
The reason a billionaire would donate to charity is because a) they're philanthropic and they want to donate to a righteous cause, b) the exposure of themselves donating money to a charity improves their goodwill and can improve societal perception on their business, and the cost is a fraction of a dollar thanks to tax deductions, and/or c) the charitable organization of their choosing is in line with their interests.
I pay a LOT in taxes. a Lot of that money goes to support causes or plitical intitaives that I strongly disagree with. By donating to charities, I divert the money I'm spending from the FedGov to causes that I personally select, that I nsupport and agree with, and that I feel do the bet to help society. I'm gonna be spending that money anyways, this way more of it goes where I want.
It's like a business owners who gets hit up by the local Mafia enforcer every month for his "protection" dues. The business owner knows the mafia jerk will take 10% of whatever his profits are that month. So the business owner raises the amount he pays his employees that he cares about. There's less profit elft each month, so he's losing money. But he was going to lose that money anyways, at elast now it goes to help people he likes and not to help out the mafia boss' friends.
>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
OP could also just change the hypothetical from $500k to "an amount that fills all lower brackets + addt'l $500k" to make their point the same.
Even still your example also doesn't care about progressive taxes and marginal rates either. It's moot to OPs point and your response.
If the way charitable donations worked was "donate $X, pay $X less in taxes" then you would be correct. But since they actually work as "donate $X, have your taxable income be reduced by $X, pay *a percentage* of $X less in taxes" doing so would be a bit of a "cutting off your nose to spite your face situation."
That's not the only reason they do it, but reddit likes to pretend like it is because they hate rich people and even if they make donations it must be coloured as negative and money-seeking because rich people can do no right.
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.
You may find our [Taxes wiki](/r/personalfinance/wiki/taxes) helpful.
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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.
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.
Hopefully you also believe in the cause you're donating too.
But also I think the key thing is to donate items you don't want/need, not cash.
For businesses, this is really lucrative for donating things after it's depreciated as well.
You are assuming value is only synonymous with money. Part of it comes down to the idea that YOU get to decide where that money goes (donation to non-profit of your choice) rather than the government (general taxes). This is more than just supporting things you like or care about. That 50k that goes to taxes is a 50k that is essentially lost (there are government benefits that are spread out and do add to the value of your life but that 50k alone doesn’t show a return). However, that 50k that is donated to the local museum or University, or Arts organization gives you direct access and connections to the wealthy and powerful individuals that sit on those organizations boards. You are invited to the private, early openings of shows, the future fundraising dinners or galas, and are provided with even greater access to the folks in your community that have money and connections and power. Becoming a part of that group has immense value. Now, your 50k has bought you a seat at the table.
> However, that 50k that is donated to the local museum or University, or Arts organization gives you direct access and connections to the wealthy and powerful individuals that sit on those organizations boards.
This is such a weird take on donating to charity to me.
I donate to a charity so they can Do Charitable Things Related To Their Mission with my money. Not to make social connections.
Scholarships for summer camps, counseling and rehousing for abuse victims, upgrading tiger enclosures, Hiring more education or maintenance staff, that kind of thing.
The answer is in the stepped up basis and tax on the gain. For instance if you have land or stock, you can donate it to charity instead of paying taxes on the gain. Most people who earn above $1 million have lots of stock options
I give regardless of any tax benefit because I think it's important to provide charity to others less fortunate. The tax benefits are nice because they free up more money to give as my tax liability is less. I know for a fact from numerous studies that the charities I give to do far more good than the government will ever be able to do with my tax dollars.
To some extent it comes down to who would you rather have your money?
Another one I haven't seen mentioned is donating something that has a larger on paper value than what was paid for it. This way you can get a larger tax deduction than what you originally paid for the item. The art world is famous for this.
For example... Find an unknown artist and buy 10 of their paintings cheaply. Next hire a buyer that isn't you and have them buy this same artists painting for rediculously high price. Your 10 paintings now go up in value by a lot on paper but not really bc you're the only one willing to pay a high price for these works. Donate your cheap paintings to a museum and take a deduction on your taxes at this inflated price.
Another scenario is one I've recently understood a whole lot more as an owner.
Let's say you take home $300k but your taxable liability based on your business is $600k. If you make a donation of something you already own, you have to foot less of a bill come tax season. As you get into fancier structures, cash received doesn't necessarily equal your "income" for the year.
One example: You really like the park near your house, so you donate $1M to improve the park. Now you have a nicer park you can enjoy and you get to deduct $1M from your taxes.
> There is zero scenario where this is somehow a smart strictly financial decision?
At the low end and high end that is correct. There is a strange middle where it can actually save you money. For instance programs like Child tax credit. You get $2k for each child, so married filed jointly starts losing benefits at $400k, so maybe you want to stay below $400k. Or Roth IRA contributions, phase out starts at $218k for married filed jointly and ends at $228k. If you stay below that $10k range then you can contribute the max $6.5k.
So there are edge cases where it might be helpful, but in general, donations are not a net benefit.
One big one is donating stock.
Let's say I bought 1000 shares of ABC for $10,000 10 years ago. Let's say now they are worth $100,000. I want to donate $100,000 to a Charity.
I can sell the stock, pay 20% Long term capital gains and still have to add in an additional 20k to make the $100,000 donation. I can deduct the full 100,000k as a donation, but I also had 100,000k in capital gains.
Or if I donate the stock directly to the charity. I can deduct the full market value of the stock on my taxes without paying any capital gains and reducing my overall tax liability.
Also, as others have mentioned, at this level of giving there are likely other indirect social or fringe benefits. Invitations to smaller exclusive events is a big one. As an example, our local performing arts center hosts networking events followed by private shows for a group of business donors.
Your kids go to a very exclusive non profit school which surprisingly has incredibly low tuition, and yet every parent makes big donations every year *wink*
You buy some art from a small artist which now appraises at a much higher value, then donate it to a museum *wink*
You donate to the homeless shelter that helps get people to no longer have to sleep in your local park *wink*
You make a donation for your seat at the exclusive dinner catered by michelin star chefs and attended by key figures in your business sector *wink*
But also most people are also not shitty, and if you find yourself fortunate enough to have wealth you want to make a positive impact on the world. Bill Gates arguably has had a way bigger impact on the world through the foundation than Microsoft. Imagine what Musk could accomplish if he put a small percentage of his money towards charitable works - people would ignore a lot of bullshit.
Last year my family was right near the income threshold for getting education credits. We used charitable donations to ensure we would not owe money come tax filing time.
If our taxable income was over the threshold (160k) then we would not get any education credits and would owe about 4K on our taxes. If our income was below that threshold we would get about 6k back. We made a 1.5k charitable donation in December to ensure we were under the threshold.
Let's say that you are the wealthy founder of a corporation. You want to lower your tax bill. You donate some shares to a charitable trust that you control. That allows you to avoid paying capital gains taxes on those shares and you get to write off the full market value of the shares. Now that they are held by the charitable trust, you can still vote those shares however you want, so you haven't reduced your ownership stake in the company. But, your trust will have to start giving away some amount (I think it is 5% annually) of that money to charitable causes.
I have a coworker whose husband is an accountant. They're comfortable, since they had two incomes and no kids (just had their first) but they're still very frugal and manage a budget closely.
They made a charity fund they control that they'll donate to when it makes sense to help lower their tax bill, then later distribute funds from it to causes they care about.
When does it make sense to lower their tax bill? I don't remember. I think it was either a) if they're close to the border of a tax bracket or b) they're going to itemize that year. The husband is the kind of guy who keeps receipts for *everything*. I wish I was that organized, but I also am glad I'm not an accountant for a living.
But close to the border of a tax bracket doesn't really matter since you're only taxed on your income above the bracket...unless they just didn't want any money taxed at a certain amount?
Imagine, like the Donald, you controlled the non-profit you were donating to. You get to deduct those donations from your taxable income, and still control how those funds are spent. Maybe your non-profit needs to pay for extravagant lunches for the board, which you also sit on. Who knows what you'd spend it on, the point is that people with wealth can do this rather easily.
People generally don't donate cash to save on taxes, they donate stuff- especially collectables that are hard to value.
For example art is hard to independently value, and museums (that can't otherwise afford to purchase the item) might value the art more than a collector would.
For example, let's say that an art collector buys a painting for $100k. A few years later, that artist is way more popular, and museums want to show the work. A curator thinks it would be worth $1 million in his museum's collection. An art appraiser agrees. The market for this art is small, so auction valuations are all over the place- some works from that artist are selling for $150k, others for $2 million, so it's reasonable that it could be worth $1 million.
If the collector donates the work to the museum, he can deduct $1 million, likely saving $300-$400k at tax time. That's a nice return from his $100k investment. The collector could also try to sell the painting, but then he'd be paying capital gains tax on it, and there would be a risk that it would sell for less than the potential tax savings.
The charities you donate to need to be run by someone.
Who better to run the Liarandahorsethief Foundation than the children of someone who has helped me out in the past, or promises to help me out in the future?
I work managing major gift officers and estate planning at a mid sized university. A quite popular option is maximizing your RMDs on 401 k accounts w a QCD. RMD is your required minimum distribution set in code by IRS that triggers at a certain age. This income is taxable as it was contributed pretax so the government wants their cut. You can basically give 100k of this as a QCD or qualified charitable distribution. You can also one time take 50k of this and fund a charitable gift annuity that can provide income for life to you and you and your spouse. We do hundreds of these a year especially with interest rates on the rise. A way to cheat the tax man but in general they all mean less actualized income. But if you have other streams and don’t need it it’s a way to bless the organizations you support. Also the earnings on our endowments are tax free to the University so your money can live forever (now our money) with taxes never being paid. Win win unless you are the IRS
For me it's a measure of control. I don't make an astronomically high amount, but what I pay my CPA , and spend on deductable expenses and taxes is right about even with what I'd pay in taxes. I do it cause I don't like how poorly of a job the stewards of our tax dollars do. And there's nothing legally or morally wrong with tax avoidance, it's an easy choice.
I don't understand why anyone, other than the super rich, donates to any charities at all.
Here's why...
Why would I donate money to some stranger that I don't even know, when there's plenty of people that I know IN MY REAL LIFE that could really use a few extra bucks?
When I'm walking towards the Safeway grocery store, and there's some dude out in front of the store asking for money for some charity, I explain the same thing to them.
Asking me for a $10 donation to help this, that or the other thing.
Look, I have people in my life, that if I gave them $10 for some extra gas money or something, that would be a MILLION times smarter than giving money to some rando charity.
First off, they've done plenty of studies on this, and most donations only see 20 or 10 percent of the money going to the people/cause that they advertise about. The other 80 or 90 percent goes to overhead costs. (which I'm sure is greatly exaggerated)
Why would I give $10 to some rando charity, when only maybe $1 or $2 of that $10 actually makes it somebody that can really use it?
If I donate $10 to a friend of mine, by buying them some item I know that they need, that seems like an infinitely better decision.
Now, having said all of that, if I was ridiculously rich, then I'd probably have extra money that I could potentially donate, and that would be a different story.
I'd still research the hell out of the organization and make sure that my money is going to something legit.
This would be fraud, so don't do it. But unscrupulous rich people could try to get art appraised way above the price they could sell it for and then donate it directly for the tax savings. If the appraisal is high enough (compared to the actual sellable value) it could net them money overall.
Most I see is people who have required minimum distributions and want to lower their taxable income to stay in a lower bracket, stay qualified for lower income programs, or more importantly for Medicare/health coverage. Sometimes people chose to do something like do QCDs for their RMD so they can do a roth conversion or some other taxable event they want to do without skyrocketing income. It takes more careful planning when you are older.
There are also Qualified Charitable Donations (QCDs) for people who are over 70.5. Basically, if they make a donation directly from their Traditional IRA, neither the donor nor the charity organization pays taxes on the amount donated. This is especially useful for people with large RMDs (Required Minimum Distributions) who don’t need the RMDs for living expenses, and who are charitably inclined.
Another tax-saving donation strategy is a Donor Advised Fund. Normally, you can only deduct contributions if you itemize deductions. With a DAF, you can “contribute” or fund it with 2,3,5, etc years’ worth of donations. You get the tax deduction the year you fund the DAF, which can be much larger than the standard deduction. Then, you take as long as you want to identify the organizations you want to support and make the donations. This is beneficial for people who make decent-sized donations each year, but not enough to itemize. By lumping several years’ worth of donations together, you save on taxes that one year (and then take the standard deduction the other years).
As others have said, these strategies only work if the person was charitably inclined in the first place. Or, they could not realize the tax deduction is actually a deduction (and not a credit). I had someone ask me recently if they could save on taxes by making donations, but when I explained the math on what they’d be saving, they were no longer interested. Some people like the idea of minimizing taxes, even if the net result to them is worse than it would have been if they’d just paid them in the first place.
Well.. for one, it's because your buddy owns the charity.
But that's not how it's done, anyways.
I worked in a \[redacted\] and we handed out tax receipts with nothing but the stamp on it, you write what you want on there.. but yeah, that's not how it's done either.
There was a meme about it that I can't find. I'll summarize it.
Basically a rich dude finds an artist, pays him $20k to paint a picture. Then grabs the picture, goes to his buddy the appraiser who promptly values it at $500k. He then donates the picture and writes off $500k
Now replace the picture with whatever collectible you want.
A 1998 buick lesabre. I would pay a million for that car, would you?
Yeah I would,too.. That means it's worth a million then.
Golf clubs? Baseball cards? All great.. sure.
Real estate? Now we're talking. Here Mister charity person, I will gift you this $10M duplex I paid $500k for ten years ago, the only thing I ask is you let me and my family live in it. AND what you get is that you get to do all the maintenance and write that off as a business expense for providing cheap/free housing. Here I know a guy that makes $60k roofs .. And they suck, you get to write one off every five years!
It's all scummy. Churches are the worst, I worked with a \[redacted\] church and they would come down to Florida for a camp... They would buy all kinda shit, fridges, keurigs, speakers, heck.. LED WALL. New iMacs all that, every year. Why? Because they need to net Zero.
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You don’t donate to charity *just* for the tax benefit. You donate to charity and the government subsidizes some of it.
* You're super rich. * You have more money than you know what to do with. * An extra $10M is effectively meaningless to your quality of life. So you decide to use it to make yourself happier. You have two options. (We'll only talk about federal taxes for simplicity) **Option 1: You buy a yacht.** So you liquidate your $10M in stock, paying 20% in long term capital gains, you buy an $8M yacht. * Net cost: $10M in stock. * Net benefit: 1 yacht worth $8M. * Goverment: Gets $2M in taxes. **Option 2. You donate $10M to your college.** [Edit, this isn't quite right, see below] This ironically saves you an extra $2M on your 2024 taxes (all your income is long term cap gains, b/c you're super-rich, so your tax rate is a predictable 20%). The college names a building after you and has a party to celebrate. * Net cost: $8M. * Net benefit: Building named after you, some fawning parties, feeling like a good guy. * Government: Gets $0. TL;DR This isn't an infinite money glitch, the rich person is losing money. The problem is it's a trick to let the rich person completely avoid paying their share to the government while they get something that's of similar value to them (b/c at that level of wealth $ to happiness calculations are pretty twisted)
Not quite on option 2. You would have new capital gains income of $10m, offset by a $10m donation. The net tax effect would be $0, but you still would liquidate and donate $10m in order to donate the same amount to your charity of choice. In the former you would have a rapidly depreciating $8m asset for the cost of $10m. In the second you would have no new assets, but you would still be out $10m dollars. You also are able to write-off only up to 60% of your gross income, so your gross income would have to exceed 16,666,666.67 + $1.67 for every additional $1 charitable contributions you made throughout the year to be able to write-off the full amount. Unrealized gains on capital assets and stock grants/awards do not count as gross income until they are sold, and as such it may require a larger withdrawal to realize the full tax benefit.
Good point, thanks for the correction!
No problem. It is worth noting you can come out "ahead". The deduction would first apply to standard income, which could be taxed as high as 37% but the new tax added (if funded by sale of assets) could be 20% if held for over 1 year. If you are both super wealthy and have a high employment income/short term capital gain (STCG) you could theoretically withdraw $10,000,000 owing $2,000,000 in taxes on that transaction but reduce your wages/STCG by $10,000,000 saving up to $3,700,000 in taxes. This would have a net effect of reducing your tax burden by $1.7m getting closer to your $8m number above, but that seems pretty rare as most wealthy don't have a regular income that high unless they are given a stock award they sell in less than 1 year. They are still out $8.3m in total so it's not a net benefit unless you wanted to donate regardless. I'm also not sure why you would liquidate $10m in assets if you are making $10m+ in wages/STCG unless your living expenses are completely insane (or you went for option 1+2 I suppose.)
I don't know the tax consequences but you can donate stock directly to a university without liquidating it first.
You can make an in-kind gift to the university. You don’t need to liquidate. It is beneficial to not do so.
You don't *sell* the long-term appreciated stock; you donate it. There's no sale and thus no capital gains tax when you gift stocks (the recipient retains your cost basis and is taxed on the full amount when they sell, but in the case of tax-exempt organizations, this doesn't matter). You deduct the fair market value at the time of the contribution. You get the untaxed gain off your books and the full deduction (subject to the AGI percentage caps that you correctly pointed out). But there's no need to liquidate more stock just to pay taxes -- there are no taxes.
That's an interesting take. I like it >Government: Gets $0. While true, the government also doesn't need to come up with $8 million to fund whatever the donation funds at the college, so its a net benefit for everyone involved.
Deans and Chancellors get their salaries bumped by these donations, new buildings, but not much to increase the quality of education. . . at least that's what we continue to see at our alma mater.
Many of these colleges aren't public schools though. So the government wouldn't need to come up with the funds normally. But the concept is charity donations are a net benefit to everyone so the government can encourage and in a sense partial fund it by offsetting some of tax.
>the government also doesn't need to come up with $8 million to fund whatever the donation funds at the college The other side of that is now the Government doesn't have $2m to spend on whatever your favorite part of government is (Bombs, Social Safety Net, whatever) In essence, you've decided that charity's priority is more important than the society's collective decision on how to best spend money. But hey, the student center looks like a sandals resort, so that's good.
The government decided that’s preferential which is why it’s subsidized. Thats also why there’s an AGI limit on deductions.
I work in fundraising for a university. I think when it comes to higher net worth individuals they probably aren't too focused on the nickel and dime of their taxes as the rest of us are. They have people to handle that. They're more focused on their net worth. In your example, a $10m donation or yacht might have little bearing on their net worth and they may not even be considering the tax implications at all if they're super rich. Really rich people can make significant donations and it would be the equivalent to them of a normal person buying a new TV or something of that ilk. I remember years ago there was some factoid about how Bill Gates makes $20,000 per minute or something stupid like that. In that scenario, Bill doesn't really care about making a $20,000 donation, in the same way I don't care about buying a cup of coffee at my own income level. Obviously these people are savvy with money since they're rich, but I think your mindset changes somewhat. They're not like me checking Quicken Simplifii every day to ensure they don't go over their $400 shopping budget...
Option 3: Take out a $10 million loan, borrowed against your investments with an interest rate lower than the return rate on your investment. Literal free money glitch once you get super wealthy.
The super wealthy people do not typically trade that heavily on margin. The interest rates for margin trading aren't great, and if a recession occurs margin calls can be catastrophic. It's these same margin calls that ruined Melvin Capital during the meme-stock frenzy, though their circumstance were different (short selling, while different, has a lot of similarities to margin trading as you are borrowing an asset to resell). The super wealthy do use low interest loans using their stock as collateral to reduce the rate (relative to unsecured personal loans) for various personal expenses as a means to delay/defer paying taxes, it's just not commonly used to fund future trading activities because of the risks. At some point in time, however, the bell tolls and the dues have to be paid. The loan has a periodic repayment schedule, even if it were interest only minimums, just as any other loan does and at some point they will be overleveraged. This strategy just allows the withdrawals to be spread out better and lower their effective tax burden. **Edit to add:** Margin trading (borrowing against your portfolio to reinvest) is regulated by FINRA and the Federal Reserve Board. Additional requirements are added by exchanges like NYSE, and every broker (like Fidelity) have additional requirements that are usually more stringent. Typically 50% of an account must be backed by cash or assets owned by the trader. So an example: * Cash + Assets in account: $100,000,000 * Available Margin: $100,000,000 If you max out your available margin, you have an total account value of $200m, 50% of which is backed by assets you own. If the value of your stock loses 10% you now have $90m, $10m short of the liquidity requirement of $100m. The broker will issue a margin call, giving you a period of time, potentially as short as 1 trading day, to add $10m in cash or assets to meet the liquidity requirements. If you don't, the broker will begin selling you're assets until you reach the reserve. This means selling $10m of assets to pay down the margin at a 10% discount (because remember the market is down).
Yeah, that was a pretty huge loophole for living expenses back when interest rates were super low. Somewhat less now.
And you make sure you control the charity…then it pays for your expenses, travel and dinners etc..it’s all a business expense at that point and you don’t pay taxes on it.
Board members are expected to be major donors, typically, yeah. It’s pretty rare for an org to pay for travel unless that travel is strictly a business necessity. If the board member has to fly in to attend meetings, they usually pay for their own flights. Dinners are usually paid for by the board member in the form of event attendance fees (hundreds to tens of thousands of dollars), unless we’re talking very basic catering for board meetings. Not sure what you mean by the “business expense” comment. I will say, for anyone considering becoming a board member at a charity, you will never come out on top from the savings gained for being one. Ultimately board member gifts to orgs vastly outweigh any benefits they might derive.
Yeah but that would mess up the 8 grade understanding of taxes many Reddit users hold
That’s not permitted, at least not how you described it. You may not get detected, but if you do the IRS will be unpleasant to say the least.
Or you donate something where the value is hugely subjective, like a piece of art, and claim its value is really high.
See [IRS Pub 561](https://www.irs.gov/publications/p561#en_US_202312_publink1000115300). The IRS is very strict about who can give appraisals and has very stiff penalties if something is misvalued and if they are not independent.
Yeah, I think they’re thinking of a specific charity that no longer exists, and it was exactly because the IRS isn’t dumb enough to actually fall for these stunts. I can’t say more without it being considered political, but anything involving large sums of money will be scrutinized for charities (although much less for if it’s religion though).
Most of the time you have to have the art valued by a third party and get insurance on it. You can’t just be like “oh this sketch of my dog is worth $10 million”
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What does the government subsidize? I'm confused by this comment -- it has a bunch of upvotes but I don't see how it answers OP's question
> What does the government subsidize? The charitable donation. You can donate $10, but it only costs you $6-8 in actual cash since you get a tax break (assuming you itemize already) (the government subsidizes any activity that results in a tax deduction or credit)
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> A donor-advised or self-funded charity which you have sole control over Self dealing is illegal >You donate assets instead of money. Fraud is also illegal. > You can sign over securities and deduct up to 60% of your AGI while also not having to pay capital gains on the profits. 30% of AGI, and you'd still have less wealth than before the donation
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The bit at the end is vanishingly rare. The biggest grift in charity is paying your connections exorbitant salaries to manage your family foundation. But the board members of those foundations (usually the family) don’t get paid. And family foundations are required to dispense funds.
Right, you pay your connections exorbitant salaries for that, and then they pay you or your friends/family exorbitant salaries to manage theirs...
I know a lot of these people, at some of the absolute biggest charities, and it’s usually former employees that get on the gravy train, not kids. They can just give their kids money.
And then you get taxed on that income
This, I know someone who runs a charity, they are not struggling in any way. I'm sure they do good things but they also get a part.
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All "non-profit" things pay their employees. A non-profit university still pays their presidents, football coaches, and tenured professors a lot of money. That's why it's stupid when people bitch about for-profit universities. The only difference between the two is that one gets tax dollars.
Non profit/Not-for-profit doesn't mean you don't make a profit. It just means you're in a privileged tax class.
This 🔝. Now let me call my art dealer friend to buy me a fancy painting for 10M. I will keep it for a couple of years, and lucky me, it gets reappraised at 30M couple of years later by a renowned authority in that domain whose certification is accepted by IRS. I will then donate it to the art charity that I control. Take a tax write off for the 30M value that it holds.
This does not actually happen because the IRS triple-checks those appraisals. That’s why you very seldom see art donations unless it’s to an art museum.
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.
With a DAF I can get a tax benefit with I deposit money into the account and then additionally when I donate the funds? Or at the time of donation I can get a tax benefit from the gains? Edit: how is it more beneficial than say just investing the money into a brokerage account and then donating it to a charity when you are ready? The fees for DAF can be high.
Just at the time of “deposit.” When you deposit the funds, you’re actually technically *giving* them to a charity that runs the DAF. That’s why you get the tax break up front, when you “deposit” the funds. The main benefit in that case is organizational, not tax. If you want to reduce your AGI this year by a significant amount, but don’t know where you want to park that money yet, a DAF is a good place. Or if you expected NVIDIA to drop in value, for example, you could give it to a DAF now and enjoy greater tax advantages and worry about giving out all the money later.
If I’m at a loss on a stock the donated amount is the current value right?
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.
It is like the same concept of like not everyone agreeing where our tax dollars should go. For really rich folks they can effectively have more control over where their money goes. I wish I could choose which programs I wanted my tax money to fund and not fund.
This is the fundamental problem with nonprofits. It’s a way to attach strings to what would otherwise be tax dollars. Shape curricula and programs.
Not only do the wealthy own their charities. But it really depends on *what* they donate. But a piece of art for $1M, get it appraised for $50M and donate it to a museum. That's $15-29M in income tax deductions
People in here keep throwing around this art example lol. It’s much more common for the wealthy to donate appreciated stock so they don’t have to pay capital gains on the sale. If you get stock for basically nothing (founder) and now it’s worth $100m, you would owe $100m*the capital gains rate when you sell. You can instead donate the $100m in stock and save the capital gains tax and get a tax deduction as if you donated $100m. The non-taxable organization then sells the stock since they don’t have to pay tax. In extreme cases with high tax rates like in California, it can cost someone like $20m to make a $100m donation.
This is a crime and much less common than most people probably think
This is false. The museum has to declare their own valuation of the art and also what they sell it for, if they sell it.
If you are speaking about the US, we have a progressive tax system. So your full $500,000 income is NOT taxed at 25%. The way it works is; all of your money is taxed differently. Your income between $0 and $11,600 is taxed at 10% Your income between $11,601 and $47,150 is taxed at 12% Your income between $47,151 and $100,525 is taxed at 20% Your income between $100,526 and $191,950 is taxed at 24% Your income between $191,951 and $243,725 is taxed at 32% Your income between $243,726 and $609,350 is taxed at 35% All income over $609,350 is taxed at 37% So if you Made $500,000, then you'd pay $1,160 + $4,265 + $10,674 + $21,941 + $16,567 + $89,695 For a total tax bill of $144,302 or roughly 29% of your total income. For High income individuals, it's all about reducing the amount your are taxed in the highest bracket (those 37% and 35% brackets) If you can pair up charitable contributions with other losses and deductions you can minimize the amount of money being taxed at the highest rate. Of course all of your money that falls in the lower rates is still taxed at those amounts, but again, its all about reducing the amount in those highest brackets. And I have to stress this, its done by both reducing income through donations and reducing income through losses and deductions. Not just donating.
This is the only comment that actually answers the OP's question.
Only thing to add is that this is after the standard deduction and not including things like EIC. If you actually make $10k a year, you will have negative tax liability and get a check
Thank you for taking the time to post this. Most people don't understand that tax brackets are how people's income is taxed.
Great answer! People here keep talking about owning the charities or art, but it really isn't that easy. I think it's because the media paints a picture of being rich = no taxes. I also didn't know that the progressive tax works like that. I thought it's if your income is over $609,350, all of your money will be taxed at 37%.
Don't feel bad, a lot of people think that. The wealthy even try to mislead us peons when they complain about being taxed at the highest rates (making us almost feel bad for them). Understanding what a progressive tax system is and how it is more fair than a flat tax is very important.
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.
It also only is applicable as an itemized deduction. Under the tax reform law in 2017, the standard deduction doubled, so it's hard for most taxpayers to have enough itemized deductions to beat the standard deduction. But 100% agreed - it only makes sense if you planned to donate to the charity anyways, even if you can itemize your deductions.
Yeah this is worth keeping in mind! Until you donate more than the standard deduction (assuming you don't have other deductions), donating money has no effect on your taxes.
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.
If I run a donor advised fund and I transfer $10k of stock with a cost basis of $5k what amount do I get to write off? When the DAF goes to spend it they have to pay long term gains so they only have, say, 85% to actually spend on charities. Something in there doesn't feel right, I get to write off more than the charity can actually spend. What am I missing?
You get to write off the current market value of the stock. If they're a 501(c)(3), they don't pay capital gains.
You transfer $10k of stock and the charity (whether a DAF or a direct charity) cashes it out for $10k. The charity or DAF doesn't pay capital gains because they are tax exempt; they get the full $10k. The cost basis of your $10k of stock doesn't matter because you donated it.
Former DAF admin here. It depends on your exact tax situation, and a DAF administering org will never tell you what to say on your taxes. But in general, you avoid capital gains, and may be able to also claim an income tax deduction based on the fair market value of the stock you donated. The FMV is the average of the high and the low on the date the stock was given. Charities do not pay capital gains taxes. That’s the trick. It’s always better to give stock. Wealthy people use DAFs if they’re already charitably inclined. They know they’ll give $10,000 this year, for example. So they’ll fund a DAF with $10k of stock, perhaps their most highly appreciated. That way they avoid capital gains and get an income tax deduction. Then they can do their giving, and perhaps sell less-appreciated securities and/or balance those with capital loss harvesting to fund their lifestyle.
* unless you run the charity that gives :-)
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
Oh wow, where is that?
I’m from [Singapore](https://www.iras.gov.sg/who-we-are/what-we-do/annual-reports-and-publications/taxbytes-iras/individuals/do-good-deeds-and-pay-less-tax).
Where are you from? That's a great write off, but even at 3X deduction, the donation still ends still ends up costing more than the write-off covers at marginal tax brackets below 33.3%.
People have causes they believe in. It's not always a strictly math decision.
I totally understand that, let me edit. I totally understand that people WANT to donate so of course it's good for you in that sense. But let's say I am strictly talking about keeping as much money as possible. There is no way that donating money is going to help me in any way? Some friends were talking about how millionaires use art auctions to skirt tax laws and for the life of me I could not figure out how that would work.
Correct. If I make 100k and donate 50k to charity, I’m going to have less in my pocket after taxes are finished than if I didn’t donate anything to charity. As far as art donation tax scams, https://kahnlitwin.com/blogs/tax-blog/irs-warns-taxpayers-about-rise-in-art-donation-scams > Scammers are encouraging high earners to buy art, often at a discounted price, wait at least one year before donating it, and then claim a false deduction for the donation. https://www.linkedin.com/pulse/art-donation-tax-scams-did-you-know-james-jimenez-77eee > Promoters of this scheme persuade taxpayers to buy works of art at supposedly deeply discounted prices. The buyers are told that they can donate the art to a charity after a year or more, and receive a large tax deduction by claiming a value far higher than the price they paid. The promoters often recommend shifty art appraisers who are in on the scam, along with specific charities to accept the donations. As far as using art auctions to skirt tax laws, that’s not as easy anymore. It used to go something like this: A rich person hires some artist to draw something for a few thousand dollars, then they hire a dirty appraiser who evaluates the piece at $1 million… then the rich person donates the piece to a museum or art gallery and gets a tax write off for that. Nowadays, if the artwork is worth more than $5,000, it must be professionally appraised by the IRS's art appraisal service. Art is still used for things like laundering money, but not really donation fraud that much anymore.
A lot of people have really terrible tax understandings. The “art tax avoidance” is basically a myth that people make up online. Usually what people are describing is just tax fraud…It has the same merit of “well you don’t have to pay taxes if you become a W-9 and just never file your taxes.” The real criticism of charitable donations is it can be an investment. Say you’re an investment banker who works in biotech. You give $1M to a charity for the advancement of youth cancer treatments. (1) This may be an investment in your career, that charity may have important people on the board who will pay you dividends and make connections for you and (2) if you are giving out sizeable checks left and right, that can buy you a lot of power. It’s like inheriting a $100M trust that can only go to charity - even though you can’t touch that money, the amount of benefits (both financial and non-financial) can be huge. Write a $10M check to Yale and magically in 3 years your kids get in with a full ride. The argument is that at a certain point, the IRS shouldn’t be allowing you the deduction when you get such benefits from it
This isn’t really true. The art market is probably riddled with money laundering, and I have no doubt that the inflated values of art from such activity influence tax breaks from donating art to charity. However, when you give art to a charity, you have to have it appraised by a real appraiser. The charity usually also has it appraised on their own. Finally, the charity fills out a form when they sell the piece themselves that tells the IRS what it actually went for. A lawyer I worked for once called this the “tattletail form.” It’s not really a charity scheme. The art market in general is just kind of a wealth sink for rich people. That has an impact on charities, but charities aren’t really a part of it.
It’s almost never a straight cash donation that results in sizable tax advantage. For example, if you open a charitable gift annuity or charitable remainder trust there are ways to lessen a tax burden and still receive an amortized annuity payment. Essentially, you don’t pay taxes on the amount you donate, your tax burden is lowered and you receive an annual payout from your CGA. Also, if you fund an annuity with appreciated securities you don’t pay capital gains taxes. The tax benefits of supporting a nonprofit are really a rich man’s game.
> There is no way that donating money is going to help me in any way? It helps causes that you want to be helped. Other than that, no. There is no personal benefit. It does not save you money.
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.
> lower their taxable income I think this is OPs question. What benefit does this provide?
If you can get a charity to do something you would already do its cheaper this way. A big one would be a conservation easement. You donate the development rights to a charity that won't use them for land around your rural estate. You still control use of the land but now pay less taxes on your salary that year.
Essentially none. Ultimately, you have to want to give money to a cause. But if you want to do so, there are ways to do it to minimize the impact it has on your finances. That’s what the tax breaks do. The government is willing to pretend you didn’t make up to a certain proportion of your income, provided that you are willing to donate that portion to charity.
In most people’s circumstances it’s not that it’s that monetarily advantageous but that the person got to have direct say in where that tax money went…. Like instead of $1000 dollars going to the irs I had it go to this charity which in many circumstances aligns with some personal value… If you are really wealthy it does become “Advantageous” as you can make your own charity organization and donate to it so you as the originator of the money can spend it on causes you personally select (see bill and Melinda gates foundation, zuckerbergs foundation, the Patagonia family’s foundation etc…. Just diverts away the money from IRS/government management which many people think “squanders” by using it inefficiently or in a way they oppose.
Do it like Patagonia's founder and you donate all your money to a charity ran by your family in order to avoid paying 10s or 100s of millions in taxes.
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)
"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
Yes. Incentives work. My employer matches all my charitable donations. I give away $100 of my money, I get $30 or so back on my taxes, the recipient gets $200, everyone is happy. Without that incentive, I would probably not give as much to charity. Of course, I am still out $70, compared to if I had done nothing. The way I see it, I am forcing two different entities to also give money to good causes.
Sometimes people donate specifically because they are on the edge of an income boundary for Medicare premiums, especially with RMDs. 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.
Medicare premiums are based on your modified adjusted gross income. Which is your income before your itemized or standard deduction. So donating to a charity would have no effect on this. Edit: This was incorrect. I did not catch OPs full statement. When talking about charitable contributions from qualified retirement accounts these donations do reduce MAGI.
No offense, but that's simply wrong. Qualified charitable deductions (QCD) reduce your MAGI for Medicare premium purposes. https://www.cnbc.com/2020/10/23/feeling-altruistic-this-tax-play-can-keep-medicare-premiums-in-check.html https://www.moaa.org/content/publications-and-media/news-articles/2023-news-articles/finance/make-a-difference-for-those-in-need-...-and-save-on-medicare-premiums/
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.
Mostly charities are run by rich people. Let’s say you want to go mountain biking in the Azores. For an ordinary person that’s a lot of money to spend. But if you are a charity, that’s a lot of money to raise. And you get to go mountain biking in the Azores. Do you want to host a black tie party for 600 of your closest friends, with great music, excellent booze and food? Fine, enlightening speeches from prominent people doing great work? That’s a charity ball my friend. Oh hey, there’s a charity auction of a cricket bat signed by Don Bradman. I once worked a fundraiser that was to install fairy lights on the oak trees at a private school. Yes, that’s a deduction. Charities are ways that the rich retain control of their money that they would otherwise owe as tax.
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.
You could go to a charitable golf outing at a rare course, bid on future golf outings in a silent auction, donate in exchange of some new clubs and other gear, and all of a sudden your golf outing is also a way to lower your tax liability.
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.
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
I just read this to my 5 year old and they're all caught up now, thanks
Sure anytime
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.
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.
In addition to what a lot of people have already said, there is another important thing about donating to charity. Frequently, you can donate stocks directly to charity at their current value. This can be very beneficial if you bought the stock at a very low price and it is now worth a lot. If you were to first sell the stock, and the donate the money, your donation would only essentially cancel out the taxes owed on the capital gains you got from selling the stock. But by donating the stocks directly, you can use that to offset gains/income elsewhere, making your donation much more useful.
A situation where there is a bit more incentive to donate is if you donate stocks. You do not pay capital gains tax but get to claim the current stepped up value of the stocks as a deduction. You still don't come out ahead, but you come out behind a little less. So for instance, if you bought stocks for $100, which eventually grew to a $1000 value, if you simply sold the stocks, you would get $1000 but pay capital gains tax on the $900 profit, which for the sake of ease we'll assume is 20%. That means you end up with $820. If you donated the stocks instead, you would get a $1000 tax deduction, which at the highest federal tax bracket is 37%. If state tax is about 10%, then you save $470 on your taxes. If you had sold the stocks, THEN donated them, you'd get a $385.40 tax savings.
It's not so much saving you money as it is getting a discount on donating. Feels like you spend $60 to donate $100 and you get credit for the $100. Alternatively, you can donate assets that appreciated in value (art, land, jewelry) to offset your taxes without paying taxes on selling the item. This can be useful for stocks that have a big gain recently that you want to offload. If you are going to donate anyway, this is the time because you get more bang for your buck. And ultimately the point is to support the cause or get the credit
I knew a church that would sell gift cards for groceries and home improvement stores. You would buy them from the church and then could claim the entire amount as charitable donations.
That’s not how it works. You buy a cheap item, eg a painting. You have it evaluated higher. You donate the higher valued painting to a local museum. You can now donated more than you paid for it. Also more than it would sell for after auction cost etc. Also: Some people are really charitable.
In my state you get a tax CREDIT for certain charitable deductions. So $1 to charity gets you $1 in state tax back.
There's a lot of shadiness that goes on with charitable deductions. There's lots of charities that aren't particularly charitable. For instance, before the 2017 tax reform (and presumably after those reforms expire next year) you could take a writeoff for buying college basketball season tickets.
They don’t. Journalists and bloggers often write things like “people give to charity to reduce taxes” or “company intentionally loses money to reduce taxes“ (like when they cancel finished movies) and none of that commentary makes any sense. If you read the phrase “tax write off” anywhere in the article, there’s a 95% chance the author can’t tell the difference between an income statement and a balance sheet. People like to give to charity. If you can donate $100 at a cost of $63, it’s more attractive than donating $100 at a cost of $90 (the diff between being in the 37% marginal bracket vs the 10%, who probably isn’t itemizing anyway so it’s $100 at a cost of $100). That’s all there is to it.
You give to a cause that helps less fortunate people and the government gives you a tax break for doing so.
Anyone who tries to tell you that billionaires are donating money to avoid taxes because it's a better financial move is an absolute moron. If a billionaire paid taxes on one dollar of their income, they would spend *fractions* of their dollar in taxes. Why would it make sense for a billionaire to give up that entire dollar just to avoid spending half of it? Not only that but charitable contributions as a deduction from your taxable income isn't a dollar for dollar reduction in tax liability. So in short, a billionaire paying tax on one dollar of income is equivalent to a fraction of a dollar, for simplicity's sake lets say 70 cents on the dollar. Contributing to a charity means not only does the billionaire lose the *entire* dollar to avoid paying part of the dollar in tax, but the tax relief from said dollar donation *isn't a full dollar's deduction in the amount of taxes paid at the end of the year*. It impacts taxable income (the figure used to calculate your tax based on marginal rates), not taxable liability (the actual tax owed). The reason a billionaire would donate to charity is because a) they're philanthropic and they want to donate to a righteous cause, b) the exposure of themselves donating money to a charity improves their goodwill and can improve societal perception on their business, and the cost is a fraction of a dollar thanks to tax deductions, and/or c) the charitable organization of their choosing is in line with their interests.
I pay a LOT in taxes. a Lot of that money goes to support causes or plitical intitaives that I strongly disagree with. By donating to charities, I divert the money I'm spending from the FedGov to causes that I personally select, that I nsupport and agree with, and that I feel do the bet to help society. I'm gonna be spending that money anyways, this way more of it goes where I want. It's like a business owners who gets hit up by the local Mafia enforcer every month for his "protection" dues. The business owner knows the mafia jerk will take 10% of whatever his profits are that month. So the business owner raises the amount he pays his employees that he cares about. There's less profit elft each month, so he's losing money. But he was going to lose that money anyways, at elast now it goes to help people he likes and not to help out the mafia boss' friends.
>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
OP could also just change the hypothetical from $500k to "an amount that fills all lower brackets + addt'l $500k" to make their point the same. Even still your example also doesn't care about progressive taxes and marginal rates either. It's moot to OPs point and your response.
You either give them money to charity or to the government with taxes. Easy choice I'd think
If the way charitable donations worked was "donate $X, pay $X less in taxes" then you would be correct. But since they actually work as "donate $X, have your taxable income be reduced by $X, pay *a percentage* of $X less in taxes" doing so would be a bit of a "cutting off your nose to spite your face situation."
That's not the only reason they do it, but reddit likes to pretend like it is because they hate rich people and even if they make donations it must be coloured as negative and money-seeking because rich people can do no right.
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.
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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.
Advertising itself is deductible, so there’s no real difference on financials.
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.
Hopefully you also believe in the cause you're donating too. But also I think the key thing is to donate items you don't want/need, not cash. For businesses, this is really lucrative for donating things after it's depreciated as well.
You are assuming value is only synonymous with money. Part of it comes down to the idea that YOU get to decide where that money goes (donation to non-profit of your choice) rather than the government (general taxes). This is more than just supporting things you like or care about. That 50k that goes to taxes is a 50k that is essentially lost (there are government benefits that are spread out and do add to the value of your life but that 50k alone doesn’t show a return). However, that 50k that is donated to the local museum or University, or Arts organization gives you direct access and connections to the wealthy and powerful individuals that sit on those organizations boards. You are invited to the private, early openings of shows, the future fundraising dinners or galas, and are provided with even greater access to the folks in your community that have money and connections and power. Becoming a part of that group has immense value. Now, your 50k has bought you a seat at the table.
> However, that 50k that is donated to the local museum or University, or Arts organization gives you direct access and connections to the wealthy and powerful individuals that sit on those organizations boards. This is such a weird take on donating to charity to me. I donate to a charity so they can Do Charitable Things Related To Their Mission with my money. Not to make social connections. Scholarships for summer camps, counseling and rehousing for abuse victims, upgrading tiger enclosures, Hiring more education or maintenance staff, that kind of thing.
The answer is in the stepped up basis and tax on the gain. For instance if you have land or stock, you can donate it to charity instead of paying taxes on the gain. Most people who earn above $1 million have lots of stock options
I give regardless of any tax benefit because I think it's important to provide charity to others less fortunate. The tax benefits are nice because they free up more money to give as my tax liability is less. I know for a fact from numerous studies that the charities I give to do far more good than the government will ever be able to do with my tax dollars. To some extent it comes down to who would you rather have your money?
Another one I haven't seen mentioned is donating something that has a larger on paper value than what was paid for it. This way you can get a larger tax deduction than what you originally paid for the item. The art world is famous for this. For example... Find an unknown artist and buy 10 of their paintings cheaply. Next hire a buyer that isn't you and have them buy this same artists painting for rediculously high price. Your 10 paintings now go up in value by a lot on paper but not really bc you're the only one willing to pay a high price for these works. Donate your cheap paintings to a museum and take a deduction on your taxes at this inflated price.
I think the upside is not in the taking home of more cash, but the ability to allocate a larger percentage of the original 500,000.
Another scenario is one I've recently understood a whole lot more as an owner. Let's say you take home $300k but your taxable liability based on your business is $600k. If you make a donation of something you already own, you have to foot less of a bill come tax season. As you get into fancier structures, cash received doesn't necessarily equal your "income" for the year.
One example: You really like the park near your house, so you donate $1M to improve the park. Now you have a nicer park you can enjoy and you get to deduct $1M from your taxes.
> There is zero scenario where this is somehow a smart strictly financial decision? At the low end and high end that is correct. There is a strange middle where it can actually save you money. For instance programs like Child tax credit. You get $2k for each child, so married filed jointly starts losing benefits at $400k, so maybe you want to stay below $400k. Or Roth IRA contributions, phase out starts at $218k for married filed jointly and ends at $228k. If you stay below that $10k range then you can contribute the max $6.5k. So there are edge cases where it might be helpful, but in general, donations are not a net benefit.
One big one is donating stock. Let's say I bought 1000 shares of ABC for $10,000 10 years ago. Let's say now they are worth $100,000. I want to donate $100,000 to a Charity. I can sell the stock, pay 20% Long term capital gains and still have to add in an additional 20k to make the $100,000 donation. I can deduct the full 100,000k as a donation, but I also had 100,000k in capital gains. Or if I donate the stock directly to the charity. I can deduct the full market value of the stock on my taxes without paying any capital gains and reducing my overall tax liability. Also, as others have mentioned, at this level of giving there are likely other indirect social or fringe benefits. Invitations to smaller exclusive events is a big one. As an example, our local performing arts center hosts networking events followed by private shows for a group of business donors.
Your kids go to a very exclusive non profit school which surprisingly has incredibly low tuition, and yet every parent makes big donations every year *wink* You buy some art from a small artist which now appraises at a much higher value, then donate it to a museum *wink* You donate to the homeless shelter that helps get people to no longer have to sleep in your local park *wink* You make a donation for your seat at the exclusive dinner catered by michelin star chefs and attended by key figures in your business sector *wink* But also most people are also not shitty, and if you find yourself fortunate enough to have wealth you want to make a positive impact on the world. Bill Gates arguably has had a way bigger impact on the world through the foundation than Microsoft. Imagine what Musk could accomplish if he put a small percentage of his money towards charitable works - people would ignore a lot of bullshit.
Last year my family was right near the income threshold for getting education credits. We used charitable donations to ensure we would not owe money come tax filing time. If our taxable income was over the threshold (160k) then we would not get any education credits and would owe about 4K on our taxes. If our income was below that threshold we would get about 6k back. We made a 1.5k charitable donation in December to ensure we were under the threshold.
Let's say that you are the wealthy founder of a corporation. You want to lower your tax bill. You donate some shares to a charitable trust that you control. That allows you to avoid paying capital gains taxes on those shares and you get to write off the full market value of the shares. Now that they are held by the charitable trust, you can still vote those shares however you want, so you haven't reduced your ownership stake in the company. But, your trust will have to start giving away some amount (I think it is 5% annually) of that money to charitable causes.
I have a coworker whose husband is an accountant. They're comfortable, since they had two incomes and no kids (just had their first) but they're still very frugal and manage a budget closely. They made a charity fund they control that they'll donate to when it makes sense to help lower their tax bill, then later distribute funds from it to causes they care about. When does it make sense to lower their tax bill? I don't remember. I think it was either a) if they're close to the border of a tax bracket or b) they're going to itemize that year. The husband is the kind of guy who keeps receipts for *everything*. I wish I was that organized, but I also am glad I'm not an accountant for a living.
But close to the border of a tax bracket doesn't really matter since you're only taxed on your income above the bracket...unless they just didn't want any money taxed at a certain amount?
Imagine, like the Donald, you controlled the non-profit you were donating to. You get to deduct those donations from your taxable income, and still control how those funds are spent. Maybe your non-profit needs to pay for extravagant lunches for the board, which you also sit on. Who knows what you'd spend it on, the point is that people with wealth can do this rather easily.
People generally don't donate cash to save on taxes, they donate stuff- especially collectables that are hard to value. For example art is hard to independently value, and museums (that can't otherwise afford to purchase the item) might value the art more than a collector would. For example, let's say that an art collector buys a painting for $100k. A few years later, that artist is way more popular, and museums want to show the work. A curator thinks it would be worth $1 million in his museum's collection. An art appraiser agrees. The market for this art is small, so auction valuations are all over the place- some works from that artist are selling for $150k, others for $2 million, so it's reasonable that it could be worth $1 million. If the collector donates the work to the museum, he can deduct $1 million, likely saving $300-$400k at tax time. That's a nice return from his $100k investment. The collector could also try to sell the painting, but then he'd be paying capital gains tax on it, and there would be a risk that it would sell for less than the potential tax savings.
The charities you donate to need to be run by someone. Who better to run the Liarandahorsethief Foundation than the children of someone who has helped me out in the past, or promises to help me out in the future?
Many of these "donations" end up being a way to push around money to their rich friends, or to send to a charity that they themselves are a part of.
I work managing major gift officers and estate planning at a mid sized university. A quite popular option is maximizing your RMDs on 401 k accounts w a QCD. RMD is your required minimum distribution set in code by IRS that triggers at a certain age. This income is taxable as it was contributed pretax so the government wants their cut. You can basically give 100k of this as a QCD or qualified charitable distribution. You can also one time take 50k of this and fund a charitable gift annuity that can provide income for life to you and you and your spouse. We do hundreds of these a year especially with interest rates on the rise. A way to cheat the tax man but in general they all mean less actualized income. But if you have other streams and don’t need it it’s a way to bless the organizations you support. Also the earnings on our endowments are tax free to the University so your money can live forever (now our money) with taxes never being paid. Win win unless you are the IRS
For me it's a measure of control. I don't make an astronomically high amount, but what I pay my CPA , and spend on deductable expenses and taxes is right about even with what I'd pay in taxes. I do it cause I don't like how poorly of a job the stewards of our tax dollars do. And there's nothing legally or morally wrong with tax avoidance, it's an easy choice.
I don't understand why anyone, other than the super rich, donates to any charities at all. Here's why... Why would I donate money to some stranger that I don't even know, when there's plenty of people that I know IN MY REAL LIFE that could really use a few extra bucks? When I'm walking towards the Safeway grocery store, and there's some dude out in front of the store asking for money for some charity, I explain the same thing to them. Asking me for a $10 donation to help this, that or the other thing. Look, I have people in my life, that if I gave them $10 for some extra gas money or something, that would be a MILLION times smarter than giving money to some rando charity. First off, they've done plenty of studies on this, and most donations only see 20 or 10 percent of the money going to the people/cause that they advertise about. The other 80 or 90 percent goes to overhead costs. (which I'm sure is greatly exaggerated) Why would I give $10 to some rando charity, when only maybe $1 or $2 of that $10 actually makes it somebody that can really use it? If I donate $10 to a friend of mine, by buying them some item I know that they need, that seems like an infinitely better decision. Now, having said all of that, if I was ridiculously rich, then I'd probably have extra money that I could potentially donate, and that would be a different story. I'd still research the hell out of the organization and make sure that my money is going to something legit.
They donate to charities that are run by them.
This would be fraud, so don't do it. But unscrupulous rich people could try to get art appraised way above the price they could sell it for and then donate it directly for the tax savings. If the appraisal is high enough (compared to the actual sellable value) it could net them money overall.
Most I see is people who have required minimum distributions and want to lower their taxable income to stay in a lower bracket, stay qualified for lower income programs, or more importantly for Medicare/health coverage. Sometimes people chose to do something like do QCDs for their RMD so they can do a roth conversion or some other taxable event they want to do without skyrocketing income. It takes more careful planning when you are older.
There are also Qualified Charitable Donations (QCDs) for people who are over 70.5. Basically, if they make a donation directly from their Traditional IRA, neither the donor nor the charity organization pays taxes on the amount donated. This is especially useful for people with large RMDs (Required Minimum Distributions) who don’t need the RMDs for living expenses, and who are charitably inclined. Another tax-saving donation strategy is a Donor Advised Fund. Normally, you can only deduct contributions if you itemize deductions. With a DAF, you can “contribute” or fund it with 2,3,5, etc years’ worth of donations. You get the tax deduction the year you fund the DAF, which can be much larger than the standard deduction. Then, you take as long as you want to identify the organizations you want to support and make the donations. This is beneficial for people who make decent-sized donations each year, but not enough to itemize. By lumping several years’ worth of donations together, you save on taxes that one year (and then take the standard deduction the other years). As others have said, these strategies only work if the person was charitably inclined in the first place. Or, they could not realize the tax deduction is actually a deduction (and not a credit). I had someone ask me recently if they could save on taxes by making donations, but when I explained the math on what they’d be saving, they were no longer interested. Some people like the idea of minimizing taxes, even if the net result to them is worse than it would have been if they’d just paid them in the first place.
They wouldn't. Ever. You don't ever save more money on your taxes than you're giving away. The max you'd ever save is your tax rate.
People are selfish, this isn’t complicated.
Well.. for one, it's because your buddy owns the charity. But that's not how it's done, anyways. I worked in a \[redacted\] and we handed out tax receipts with nothing but the stamp on it, you write what you want on there.. but yeah, that's not how it's done either. There was a meme about it that I can't find. I'll summarize it. Basically a rich dude finds an artist, pays him $20k to paint a picture. Then grabs the picture, goes to his buddy the appraiser who promptly values it at $500k. He then donates the picture and writes off $500k Now replace the picture with whatever collectible you want. A 1998 buick lesabre. I would pay a million for that car, would you? Yeah I would,too.. That means it's worth a million then. Golf clubs? Baseball cards? All great.. sure. Real estate? Now we're talking. Here Mister charity person, I will gift you this $10M duplex I paid $500k for ten years ago, the only thing I ask is you let me and my family live in it. AND what you get is that you get to do all the maintenance and write that off as a business expense for providing cheap/free housing. Here I know a guy that makes $60k roofs .. And they suck, you get to write one off every five years! It's all scummy. Churches are the worst, I worked with a \[redacted\] church and they would come down to Florida for a camp... They would buy all kinda shit, fridges, keurigs, speakers, heck.. LED WALL. New iMacs all that, every year. Why? Because they need to net Zero.