How is it possible to give to charity “for the tax write offs”? I see that you don’t pay 30~40% tax on the amount you donated, but you no longer have 100% of the amount so surely you’re worse off.
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You give money to a charity and that charity uses it to *operate.* Depending on the size of the charity money is also spend on pay for employees, rent, utilities, etc…
Some companies also run charities under a seperate legal entity. (Not necessarily with bad intentions.)
If those companies give to their own charities, they ensure operational costs of the charity while simultaneaously reducing tax for the for profit company So it is a win-win situation.
You have the right idea, but there’s a big exception.
Things that have very subjective value, like art, can work to one’s favor this way. Museums for example, don’t have much of an incentive to disagree if you claim a piece of art you’re donating is worth several times what you could actually sell it for. So if you donate art with an inflated value, you could donate a painting that would sell for $50,000 and claim it’s worth $250,000. If you make a large income, this can be more profitable than selling it.
Well, for starters, people tend to think a lot more highly of you if you give a bunch of money to charity. So, that money doesn’t just disappear. And, there can be other indirect benefits. If you like the opera, helping to keep the opera open with donations is a lot cheaper than buying lots of opera tickets, thanks to the write-off. Maybe you’ll even get your name put on a building. ~~For big companies, this benefit mainly comes in the form of cheap advertising~~. *(Not correct… just regular-cost advertising with some warm fuzzies baked in.)* Basically, it’s a 30-40% discount on money you were already going to spend, anyway.
Also, corruption: People like… I don’t know… “Ronald Grump” and “Felon Husk” run corrupt charities that often just give the money back to them or their families. Running a charity could be an easy way for your Cousin Ed to have a 6-figure job doing basically nothing, you know?
“Fine Art” is big one. You buy a sh*tty painting for $10,000. Then, the painting *magically* goes up in value to $15,000,000. You graciously donate the painting to a museum. Ta-Da!
I’m sure there are other strategic tricks I’m not aware of, too.
People don’t donate money just to receive a tax break. That’s just something that cynical people say to dismiss the charitable contributions of the wealthy. The exceptions are some of the foundations that are really just fronts to pay off their friends and political allies.
If your tax bracket is high enough, donating stock can reduce your tax burden more than you would net by selling it.
For example, say you executed stock options to buy 10,000 shares of UNICORN for $1 each, but each share is now worth $101.
At a 51% effective bracket (including state + federal short term cap gains), you can sell these shares for a net profit of $1,000,000 * 0.49 = $490,000. But if you donate the stock, you can write off $1,000,000 * 0.51 = $510,000 of taxes you would have paid otherwise, leaving you an effective profit of $500,000.
It’s not possible, and any confusion you have is because you understand if perfectly, and so many other people don’t.
If you give money to charity, you will end up with less money than you had. You can’t make a profit by giving to charity (unless you lie about the value of the stuff you gave).
(This is in the US, by the way. In the UK charitable giving works slightly differently, but the effect is the same).
You give $100 to charity. The government, at the end of the year, gives you some back. Maybe $25, depending on lots of factors. They don’t give you back the whole $100. They definitely don’t give to back more than the $100.
So you’re only really out $75, while the charity effectively gets $25 from the government. It’s a pretty nice system. We are encouraged to give to charity, the government gives to charity, and it basically uses our giving as a popularity contest to figure out where to give. But there is no way at all that you will end up with more money than you started with.
It depends on the tax system, but in the places I’m aware of then yes, if you do everything by the rules, you can’t actually make a profit by donating to charity. Tax incentives for charitable donations essentially just allow you to make a bigger donation with the same amount of money. Though people can obviously get enjoyment or reputational benefits from donating large amounts of money to charity.
However, there are a lot of scams involving charities. Sometimes people will donate an expensive object (like an artwork) to charity and exaggerate its value, allowing them to get a tax write-off that’s bigger than the real value of their donation. Sometimes people set up a whole scam charity that funnels its income back to them somehow, so they get the write-off and get to keep the donation too. Sometimes people set up charities that spend some of their money on non-charitable activities which benefit them somehow. These scams are generally illegal, but people sometimes get away with them.
You are correct. The only way the scam works is if you control the charity you are donating to. Then, even since you’ve given the money away, it’s still “yours”.
So you start a charity and get your kids/wife/cousin to run it. Then you can give the charity money tax free. And the charity buys a boat to take sick kids sailing, but mostly you just use the boat yourself.
The idea behind it is you give away things that weren’t actually worth money to you.
For example, many rich people donate cars or boats to charity. To them this isn’t “losing” money because it often happens shortly before they buy a new car or new boat. They’re rich, so they don’t really care so much that they didn’t get money for *selling* the car/boat.
There’s also a more complicated bit. Rich people can play fast and loose with their income. For example, you hear about CEOs “reducing their salary to a dollar” sometimes. Fun fact: if your salary is $1, that’s what you report to the IRS and that’s what you pay taxes on. The reason the IRS lets this slide is it’s assumed the CEO is going to sell some stock or other assets *instead* of making a salary, and they still have to pay a tax called “capital gains” on that sale.
So donating a lot to charity can allow a rich person to either take some more income or sell some other assets without having to pay taxes on it because they “pay” the taxes by donating the thing. If it’s a thing they didn’t really care about having anyway, they haven’t “lost” anything.
It’s also true that the value can be a sliding scale. Not all donatable things go down in value. If I buy a thing for $100,000, then auction it off for $300,000 and donate that money to charity, I created $200,000 of tax deductions for doing almost nothing. If I had sold that thing without donating the money, I’d have had to pay MORE taxes. (This is a bit oversimplified, the rules for “selling” things for charity donation are very strict and rich people can afford the lawyers to help them do it properly.)
So rich people tend to invest in a lot of things like art or boats so they can hold on to them and use them as tax deductions when they need to liquidate other assets that are taxed.
People give for a variety of reasons. The tax write-off is just an additional incentive. Then again, given how poorly most people understand the tax bracket system, they may think they’re getting 100% of their donation written off.
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