You hear a lot about how “the rich” are using charities to effectively reduce their tax to minimal amounts, among other methods.
On the face of it without digging, it obviously makes people angry and detest the rich. But scratching beneath the surface, I’m not quite sure how exactly they would achieve this? In order to claim the tax back from money donated, you still have to… donate money? Which would still equal more than the money claimed back from tax.
So unless they are actually doing something illegal and funneling money through a charity, claiming tax, and then using that money from the charity to fund purchases not related to the charities mission, how exactly is it benefiting the donor (financially)?
In: Economics
Often the charity is an organization they control/own and does minimal charitable work.
However, there are many ways they can use the charity to give family/friends jobs, or curry favor, award contracts for work on behalf of the organiation, or hold fancy events and take trips in the name of the non profit as part of their mission.
People get mad when they own the charity they’re donating to.
For example, Elon Musk donates to the Musk Foundation, which Musk is in charge of and who’s mission is to give grants for space exploration. Sometimes this means giving money directly to SpaceX, or it’s partners, or it’s researchers, at a preferable tax rate.
There’s several different ways. A very notable example was when Donald Trump used money from his foundation to buy a painting of himself that he hung in his office. Donald Trump donates a million dollars (or whatever it was) to the Donald Trump Foundation, which then uses that money to buy something that Donald Trump wanted. *Technically* Donald Trump doesn’t own the painting, his charity does, but what difference does it make?
Billionaires will also donate money to charities that they own and control that have large endowments. The money in the endowment can be invested, and frequently is. Also money in that charity can be spent in all kinds of ways that could technically qualify as charity work, but aren’t really. Let’s say a billionaire has their own charity that’s really for environmental causes. Every time that billionaire flies to a tropical island on their private jet, they can charge it to the charity. They can claim they’re visiting the island on the charity’s behalf to see the local wildlife population.
Also they’ll overvalue certain assets to give themselves a bigger charitable tax break. They donate a painting to be auctioned off at a charity. Who says what the actual worth of that painting is? All you need is an appraiser to say it could be worth $100 million and now you can write off that amount on your taxes.
These are somewhat egregious examples; the reality is slightly more subtle usually, but hopefully this gives you an idea.
Short answer: they don’t. The wealthy *do* donate a lot to various charities, but it doesn’t help them much come tax time. A lot of people hear “tax write-off” and think that means the taxes are reduced by the amount donated, which isn’t how that works. At all. What actually happens in the taxable income is reduced, which does reduce the taxes owed, but not by anywhere near as much as people think it does.
For example, let’s say I made $10 million last year, after all deductions. I would owe $3,655,208 in federal taxes. Now, let’s say I donated $2 million to charity. That doesn’t reduce my taxes by $2 million, that reduced my taxable income by $2 million, meaning now I’m only taxed on $8 million. That still comes out to $2,915,208, saving me $740,000 in taxes. But I’m still down the $2 million I gave to charity.
So where I had $6,344,792 left over after taxes before donation, I now have $5,084,792 left over and a charity has $2 million.
So why do the wealthy do it? Because contrary to what people like to soapbox about, the wealthy aren’t *all* a bunch of heartless bastards, that’s why. And even some of them that *are* still do it for public image.
You’ll need to acknowledge that there are gradations between “benevolently giving charity”, and “doing illegal things with your charity”.
Example: you can give money to a private school as charity. Maybe that school is really small. The only kids in it are your own kids. Still (probably) legal.
Example: you can give money to a charity. And that charity can (and should pay) its employees. Maybe the charity is run by your son. People who run organizations get paid well, so he should be paid well. Still (probably) legal.
If you think we should make either of these legal, I don’t disagree with you, but also remember to walk them back a little towards the benevolent side: what if your kids are 50%, or 10%, of the students in a school? What if your son isn’t the CEO, but some other lower role in this charity?
And, to be honest, we all do this too. I give money to non-profits that I then benefit from: synagogues I pray in, sports leagues I play in, political movements that would benefit me financially if it were successful. It’s not fraud to give charity to things that benefit me, and to avoid taxes through it. But it’s something we should be aware is happening when the richest Americans do it to avoid keeping our government afloat.
Rich person here who gives to charities. I have no idea what’s the norm for other rich people, but I’m not sure I’d trust a lot of Redditors’ theories on what rich people commonly do.
Personally, I give to charities that don’t benefit me whatsoever. It lowers my taxable income, but I’d have more money if I didn’t give at all.
Charitable donations don’t cut one’s taxes in absolute terms, nor does one save money overall by donating to charity. Basically, the amount of donation is deducted from taxable income, so they don’t pay taxes on the amount donated (provided their overall deductions are enough to itemize).
So say somebody donates $10,000 to a charity and is in the 35% marginal tax bracket (income between $432k – $648k for married couple). They would save $3500 on their taxes, so the donation would feel like $6500 instead of $10,000. Basically, they’re getting a discount on the donation. But their bank balance is still lower overall by $6500 vs. had they not given the money away.
The correct answers here aren’t exactly ELI5, so I’ll take a go at it.
For easy math, let’s say the tax rate is 10%. If you made $100, you would pay $10 in taxes. But there are two types of income: taxable and tax-exempt. What this means is you don’t get taxed on that entire $100. What you pay for health insurance is exempt, for example. Charitable donations are also tax-exempt, so if you donate $10 of your $100 to charity, you are only taxed on the remaining $90. People will often represent this as getting a tax break; using that same $10 charitable donation, people would say you got a $1 tax break because you only owe $9 after making the donation (10% of $90) instead of the full $10 you would owe if you hadn’t made the donation. You’ll notice that you still had to pay $10 to get that $1 less in taxes, so you’re right to question things
The complication comes in with tax brackets and types of income. Say I’m the CEO of ABC Inc. I get a salary of $100 from ABC and I get stocks from ABC. Now, the income tax is not a flat rate; let’s pretend that the brackets are 0% below $20, 5% for $20-$60, and 10% above $60. Stocks are also taxed separately from income, let’s say that’s a flat 2.5% rate.
So I make my $100 income and would owe $6 in taxes between the tax brackets. But I have personal loans and business expenses and other tax-exempt income, so on paper I only have $40 of taxable income. So I donate $20 of that $40 and keep the $20 that I owe nothing on. I still gave away $20, but that donation makes me look good which makes my company look good which makes my stock prices go up. I can sell some of my stock in ABC, making me $180 that is taxed at 2.5%. So overall I owe $4.50 on $240 in my pocket ($60 tax exempt + $20 at 0% tax + $180 from stocks). But wait! While my stock in ABC was profitable, I also had stock in XYZ that took a loss. I can claim those things, so on paper my taxable income from stocks was $0. I still have $280 in my pocket, but now owe nothing in taxes.
People in-general don’t understand tax laws (again, they are rather convoluted; even my examples aren’t perfect partly due to simplification) and certain individuals/media outlets take advantage of that to push untrue narratives; a politician might say I got a $6 tax break because of my donations and deductions, which is true as I owe $6 less in taxes than if I didn’t have those, but they’ll make it sound like the government gave me $6. Sometimes donations are made as genuine humanitarian efforts, sometimes they are made to help shift around tax burdens and manipulate gains/losses/taxable/non-taxable income totals. Some would say that I paid $0 income tax and that’s not fair (which is true, I paid zero income tax because I donated it all), and others would say the 2.5% tax rate on stocks isn’t fair when income tax is 10%.
The IRS is well aware of all of these scams. Private foundations are strictly prohibited from doing things which directly benefit donors. Donors get to attend fancy dress galas etc, but [rich person] could go out for an expensive dinner for a lot less. Donating to legitimate charities let’s rich people choose who their money benefits while paying taxes does not, but the donations just reduce the amount of income they have to pay taxes on it doesn’t directly reduce their tax liability.
if you’re looking for a deep dive into billionnaire chicanery and how they support Charter schools, and start charitable foundations to funnel money back to themselves, this redditor has been running a series of posts on it for a few years now:
Billionaire’s Boys Club Part 5 – The Foundational Strategy – This shit is getting SCARY Apes!
byu/BadassTrader inSuperstonk
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