How do the rich use charities to minimize their tax?

Question

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

Answer 1

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.