[ Question ]

How to make the most impactful donation, in terms of taxes?

by Katie S 1 min read14th Jun 202012 comments

27


Hi, this is my first time posting.

I want to start donating 10% of my income to charity. However, this would be about $10,000 a year -- i.e. just under the standard deduction, such that none of it would be tax deductible. This seems ridiculously inefficient. I could be somewhat more efficient by clumping my donations -- e.g. donate $30,000 per 3 years, and get $18,000 of it tax exempt. But I want to do better.

My dad itemizes his taxes and is in a higher tax bracket than me (50% income tax). If he were to donate $20,000, he'd get $10,000 back on his tax return. So if I gave my dad $10,000 and he donated it, my donation would be literally twice as impactful as if I did it myself.

The question is, are there any legal issues with this?

  • Giving the money to my dad: I know that the gift exemption is $15,000, so I could give my dad up to that without either of us noting it on our taxes. I do want him to do something in particular with the money -- is there any way that could cause it to not be considered a gift? It seems like in practice, many things things that would fall under the gift exemption do come with expectations (e.g. a parent giving their child money they intend the child to use for rent).
  • My dad writing the donation off: Would there be anything preventing my dad from writing the donation on his taxes? There's something about how if you make a charity donation, you're not supposed to write it off if you receive or expect to receive a benefit from it. I'm not sure if this means "from the charity" or "from anyone" though. (It's also unclear my dad would be receiving any benefit, because this is dollar-neutral for him). Another example that this can't too literal -- I imagine some EA might want to take their new EA friends out for dinner to celebrate them starting the Giving What We Can pledge -- that seems like it shouldn't negatively affect anyone's taxes.
  • What if my friends also want to maximize their donations by routing them through my dad? Is anything different because they aren't family members doing the giving? No one involved would be writing any legal contracts or anything.

Thanks in advance for any advice! I know taxes are boring for everyone, but I don't want to miss the opportunity to make my donations more effective.

27

New Answer
Ask Related Question
New Comment

3 Answers

In the US, you might also invest the money in high risk high return investments that are more likely to increase a lot or decline to near zero over time (e.g. a leveraged ETF, to limit your downside to your investment), hold them for a year or more, and then sell them to realize losses or donate the appreciated securities if they rise. This has several benefits:

  • If the investment declines, you get to take the loss and use it to reduce capital gains tax or deduct from ordinary income (up to $3000 a year) if you have no capital gains
  • If it appreciates you get the regular tax deduction (you can give up to 30% of income in appreciated assets), and also avoid capital gains tax
  • Because it is high risk, if it appreciates it is more likely to appreciate a lot, so when donated it will help you clear the standard deduction by a larger amount
  • The elevated expected returns can increase the expected value of your donation quite a lot (i.e.. on average you will give a lot more dollars, even though they will be concentrated in a smaller fraction of the possibilities)

Don't do this before reading up extensively, but here are several discussions of the issues from an altruistic perspective.

https://reducing-suffering.org/should-altruists-leverage-investments/

https://docs.google.com/document/d/10oDwoulY6jR01ufewyO3XOQvA85Yys7LXWgTUrJt980/edit#heading=h.gl3bx4art973

https://docs.google.com/document/d/10oDwoulY6jR01ufewyO3XOQvA85Yys7LXWgTUrJt980/edit#heading=h.gl3bx4art973

https://forum.effectivealtruism.org/posts/g4oGNGwAoDwyMAJSB/how-much-leverage-should-altruists-use

Hi Katie!

This is a bit of a more complicated question with a number of options. If you like, you can contact me. aaron@electionscience.org. I write a lot in this space: https://www.aaronhamlin.com/articles/#philanthropy

Some options:

  • The gift route is one idea. Though this comes with some complexity as you mention.
  • You could invest the money and wait for longer than one year to be able to deduct the appreciation and the original investment.
  • If you have a match through your employer, this is a great route.
  • If you do clump your donations together, it's worth shooting an email to the charity you're giving to so they have a heads up. Make sure to let them know you're just considering this option and that you're not promising anything. This does two things: (1) it doesn't bind you to a gift if you change your mind for some reason and (2) it lets their philanthropy department know that you haven't dropped off in odd years. They may (or should) worry otherwise.

Other recommendations:

  • A donor advised fund makes giving much easier once you start talking in the thousands and you're using stocks or other non-cash assets.

Also, the highest tax bracket is 37%. https://www.nerdwallet.com/blog/taxes/federal-income-tax-brackets/ [Note that this is only Federal. I should assume that you're talking state and Federal as Gordon pointed out.]

And congrats on your charitable giving plans!

Hi Katie,

In terms of practical advice, Aaron has it covered. (As a fundraiser myself, please do let the charity know if you plan to bundle several years' giving into one).

But I have a more fundamental question: why don't you want to just pay your taxes?