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
I’m an accountant. I used to do the accounts of a charity which was an arts charity, which owned several large important paintings.
It was controlled by a very rich man, which I won’t name, who had donated these paintings and works of art to the charity for display.
Of course, for some period of the year, they were also at his house.
So he got the tax relief on the donation, but also broadly control of the works of of art.
Not a direct answer to this question, but charitable donations can also be used to “hide” the movement of money.
For example, let’s say I have a manufacturing business and want my company to be chosen for a lucrative government contract. I can’t directly pay the government official in charge to select my company, that would be a bribe. But let’s say that government officials wife sits on the board of a charitable organization and receives bonuses when the charity does particularly well. My company could make a large donation to the charity. This would provide income to the family of that government official to sway their opinion while also making my company look good.
They create their own charitable foundations which they are able to operate within the rather loose guidelines of what makes it a charitable foundation.
Lets make up a rather egregious but probably borderline legal example:
Say I developed a charity that disburses scholarship money to deserving high school students. Every year, the charity picks out 10 deserving students from my hometown school and awards them with $10,000 to put towards their further education.
This charity only costs me $100,000 to operate. I cannot afford that, so lets also pretend I’m stinking rich. I like this example. I want this charity to stay afloat forever. At first I’ll need to donate $100,000 every year. That’s not saving me money though, I’m just giving it away.
One way to make a charity self sufficient is to set up investments in what’s called a “trust”. This trust sets guidelines that decide how the investments are managed and how the funds are disbursed for charitable purchases. i.e. the trust would decide how much money can be given away every year, and it can also decide the eligibility criteria for deserving students. I can manage the trust myself or appoint another person (or family member) to do so. As long as the foundation operates within the guidelines of the trust, it should qualify as a charitable donation.
Now time for the abuse. I want to live a lavish lifestyle, and I want to pay for it as efficiently as possible.
Lets say I earned $10M last year, and I want to buy a house. Instead of paying taxes on that $10M and being left with around $6M for myself, I decide to donate the entire $10M to my charity. I then direct the charity to purchase a $9.9M home which I will be allowed to rent at a discounted but otherwise “fair” rate of $5k/month. The other $100k can go to the students.
The home is property of the charity, it’s an asset, and it’s expected to appreciate in value. Therefor it’s contributing to the future health of the foundation. It doesn’t matter that it will be our family home for generations to come.
Next year I earn a lot of money again, and I want to furnish and decorate this home to my liking, so I buy obscure paintings and artwork through private deals. The real purchase prices are often not public, but I know a high end art dealer that can get them appraised for a high value.
I commission 5 paintings from different artists for $10,000 each. I get my appraiser to value them, and he determines that due to the uniqueness of this one it’s worth $100,000. Another is only $5000. This one here is $20,000. These paintings aren’t hitting the auctions anytime soon, so there’s not much fact checking going on. The appraiser knows the game.
The $100k and $20k paintings, I donate to the charity at the appraisal value. The other three I keep for myself until they “appreciate in value”. All 5 of them get hung in the house I rent from the charity. I get a charitable donation deduction for the $120k of donated assets to the charity. My tax rate is around 40%, so that deduction is worth $48,000. I effectively commissioned 5 professional paintings for only $2000.
All of the physical assets I would buy for myself, I am using clever ways to deem them as assets and growing investments held by the charity, and using the home as a storage facility for these assets.
What’s next? Well vacation homes of course. The charity holds real estate in the trust, so lets expand that. The charity buys a property in the Hamptons, in New York, L.A., etc.
We expand the charity to start giving scholarships in other cities. This should justify transit between these cities, so now it’s reasonable for the charity to own a private plane and hangar for transporting charity board members.
I want a vacation property in the Caribbean, so guess where the charity expands next? We give out a few grand of scholarships every year, and this justifies our flights to and from the vacation property that the charity owns.
All of these things cost money, don’t get me wrong. But since most of my money is being funneled through the charity, I’m able to enjoy these luxuries on what is essentially pre-tax income.
The charity is still doing good things, and when I die I’ll die with zero dollars in my bank account, but who cares? I’m dead and I can leave the charity to my kids.
It doesn’t benefit the donor at all. It benefits the charities. People just like being able to demonize people for having money
When someone owns a charity they get pretty sizable tax breaks.
Take the Walton Family. These figures are from 2015, but they had their own charity, the Walton Family Foundation, and they donated something like 0.04% of their income to it – about 58 million dollars over 23 years, but just owning the charity gives them a tax break of over 3 billion per year. What they spend is less than 1% of what they save.
The IRS only requires a charity spend 5% of their income on their mission, which also opens the door for people to utilize Jackie O. Trusts. Essentially, this is where any unspent donations after 20-30 years are returned to the beneficiaries, tax free. Going back to the Waltons, this means that of the tiny percentage they give to their charity, only a fraction of that is spent on their mission – the rest goes to other members of the family.
There also isn’t much oversight on how charities spend money, or what they spend it on. Going back to the Walton Family Foundation, it funds the Crystal Bridges Museum of American Art… where they display Alice Walton’s collection of art. Essentially, they get a massive tax break every year for spending a tiny amount of money on their own property, and anything they don’t spend funds their families lifestyle.
So, the trick is to donate money to a charity that you still effectively control.
Yes, it isn’t a zero tax hack for everything, but if you have personal goals that can be accomplished via a charity, routing money though one is a solid way to avoid being taxed on that amount.
There are other corporate charitable donations that create income. Case in point, Susan Komen Foundation gets a small portion of every purchase of a box of cereal because, let’s say, Cheerios is the corporate sponsor. The cereal company takes the write offs, all while they boost their overall sales of their product and add to their bottom line, from a consumer who perhaps wouldn’t have bought cereal or bought another brand. The consumer wants to support Komen and feel as if they’ve gained some benefit from the transaction other than altruism, because they think they saved money on a product with an already astronomical mark up.
When the drive through at the fast food joint or the gas station attendant asks if you’d like to donate to charity X, they collect your cash, donate it to charity X, and then take the write off. Charitable money laundering. You want to donate to a charity, send it to them direct.
the run the charities as vanity projects so they are just paying themselves with their own money to avoid taxes.
Firstly, the people here saying “the rich don’t gain anything from this” are mostly lumping “millionaires” with “hundred millionaires” and “billionaires.” There is a GIGANTIC difference between each of those. Like, as big of a difference between someone who has $1,000 in their bank account and $1m in their bank account.
So let’s just talking about the ultra wealthy ($100m+ net worth). The main way they minimize taxes is by setting up their own charitable foundation. When you transfer your wealth to a charity, you get to deduct that from your taxable income.
Super simplified:
– Let’s say someone made $10m in a year (through salary, dividends, or selling stock). Instead of paying taxes on that $10m, they donate it all to their foundation. Now they have $0 income for the year, so instead of paying around $2m in taxes they pay $0.
– What might an ultra wealthy person spend money $10m on in a year? Give it to their kids? Buy a private jet and fly around the world? Buy priceless art? Maybe a painting of themselves? Throw extravagant parties? But instead they give $10m to their charity, yay helping the needy!
– Then the foundation hires the rich person’s kids as the directors at $500k salary. The charity sets up offices all around the world, so they need to pay for travel and accommodations at all those locations. The charity buys a Picasso to hang on the walls. They need to throw large fundraising galas.
Speaking of art:
– Two billionaires, Billionaire1, Billionaire2, all set up nonprofit art museums.
– Billionaire1 donates $10m to his museum, and the museum purchases a minor Picasso previous worth $1m for $10m dollars It even makes the news! (“minor Picasso painting sells for $10m!”)
– Billionaire1 gets to deduct $10m from his income, he saves $2m from his taxes that year, foundation, museum gets a Picasso now worth $10m.
– Billionaire2 also has a minor Picasso he had previously purchased for $1m. Instead he donates it to his foundation, and puts down $10m as its value (because didn’t you read the news? minor Picassos are now worth 10m). Now Billionaire2 gets to deduct $10m from HIS taxes.
– Billionaire1 and 2’s net worths essentially stay the same (if you include their foundations as part of their net worth), except they both got to skip out on having to pay $2m in taxes.
(This isn’t the only way billionaires use art as a way to enrich themselves btw, they also take non-taxable loans against it, or take out ever-increasing insurance policies, etc).
So next time you ask “why are people paying increasingly large amounts of money for pieces of art at auctions?” Now you know why.
It’s not a financial benefit but giving money to charity is soft power. Ie my dad used to work in a school and caught a boy running a protection racket, they didn’t want him expelled because the kids family gave money to the school.
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