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
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.
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