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
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.
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