Why do people donate to charity to "avoid tax"?

[Alphathree33]

So I don't get why this is such a "genius" strategy.

"LEARN HOW TO AVOID TAX!!!" The secret? Donate to charity!!!

Scenario:

You earn $1,000,000. You could pay tax of 40% and keep $600,000.

Instead, you donate $500,000 to charity and keep the remaining $500,000, tax free (thanks to the tax credit you got for donating.)

Did anybody notice that $500,000 < $600,000?

 

[hypn0tik]

Because people would rather give the money to charity than to the government?

 

[IEC]

Originally posted by: hypn0tik
Because people would rather give the money to charity than to the government?

Winnar!

 

[vi edit]

If you donate enough you might drop yourself a tax bracket or two making for significant savings.

 

[robphelan]

Originally posted by: vi edit
If you donate enough you might drop yourself a tax bracket or two making for significant savings.

double winnar!

 

[spidey07]

Originally posted by: vi edit
If you donate enough you might drop yourself a tax bracket or two making for significant savings.

I see common sense prevailing in this thread!

 

[TreyRandom]

Originally posted by: Alphathree33
So I don't get why this is such a "genius" strategy.

"LEARN HOW TO AVOID TAX!!!" The secret? Donate to charity!!!

Scenario:

You earn $1,000,000. You could pay tax of 40% and keep $600,000.

Instead, you donate $500,000 to charity and keep the remaining $500,000, tax free (thanks to the tax credit you got for donating.)

Did anybody notice that $500,000 < $600,000?

You would still pay tax on the remaining $500,000 - it wouldn't be tax free. You simply don't have to pay tax on the donated portion.

Some people get an incredible amount of pleasure donating to causes that they feel are worthwhile. It would thrill me to no end to be able to drop a cool half-mil on my church. If I were already well off, I'd much rather they use the full $500,000 than me get $300,000 and the gummint get $200,000.

 

[Ns1]

'grats OP, thanks to vi_edit and hypn0tik, you are now 2 steps closer to an epic fail thread!

 

[SphinxnihpS]

LOL@THIS THREAD

 

[Codewiz]

I donate to my university scholarship fund. This is 80% tax deductible. On top the more I donate the better season tickets I can get. So I lower my tax bracket, help my university, and I get better seats for football season.

 

[CPA]

Originally posted by: Ns1
'grats OP, thanks to vi_edit and hypn0tik, you are now 2 steps closer to an epic fail thread!

Well, I'm about to bring it to the third and final step - I have never, ever heard someone claim that charitable contributions are a "secret" way of avoiding taxes, EVER! And you know why? Because they're NOT! Itemized deductions, which charitable contributions belong, are limited based on your income. So, someone making $1M will not be able to deduct the full $500K. That's right, our great <sarcasm> tax system reduces your allowed itemized deductions the more you earn.

But, let's use your scenario anyway - the taxpayer does NOT reduce is tax liability to 0. Why? Because his earnings were still $1M. So, assuming you could, though we know you can't, take the full $500K as a deduction, you still have to pay taxes on the remaining $500K! You're OP logic is flawed. The remaining is NOT tax free.

So, I repeat, I have NEVER heard someone, at least with any amount of tax knowledge, claim that charitable deductions is some sort of magical tax haven. It's not! and most people understand that.

Now, if you need a real tax haven, look into trusts.

 

[Ns1]

Originally posted by: CPA

Originally posted by: Ns1
'grats OP, thanks to vi_edit and hypn0tik, you are now 2 steps closer to an epic fail thread!

Well, I'm about to bring it to the third and final step - I have never, ever heard someone claim that charitable contributions are a "secret" way of avoiding taxes, EVER! And you know why? Because they're NOT! Itemized deductions, which charitable contributions belong, are limited based on your income. So, someone making $1M will not be able to deduct the full $500K. That's right, our great <sarcasm> tax system reduces your allowed itemized deductions the more you earn.

But, let's use your scenario anyway - the taxpayer does NOT reduce is tax liability to 0. Why? Because his earnings were still $1M. So, assuming you could, though we know you can't, take the full $500K as a deduction, you still have to pay taxes on the remaining $500K! You're OP logic is flawed. The remaining is NOT tax free.

So, I repeat, I have NEVER heard someone, at least with any amount of tax knowledge, claim that charitable deductions is some sort of magical tax haven. It's not! and most people understand that.

Now, if you need a real tax haven, look into trusts.

TRIPLE KILL!

 

[maddogchen]

so OP, when can I tell the Red Cross to expect your donation?

 

[MrWizzard]

Originally posted by: Ns1
'grats OP, thanks to vi_edit and hypn0tik, you are now 2 steps closer to an epic fail thread!

HE HE HE HE HEADSHOT!

 

[Illusio]

I donate to charity because i want too. The tax break is just encouragement for me, and a nice bonus.

 

[silverpig]

Originally posted by: vi edit
If you donate enough you might drop yourself a tax bracket or two making for significant savings.

Not really... You only pay the higher tax rate on the income above a certain amount. It's funny when people say they want to decline a raise because it'll put them up a tax bracket and they'll end up with almost no more money.

Let's say the tax rate is 33% up to 99k/yr and 40% above that.

Let's say you make 99k. You pay 33% tax, so you end up with 66k take home.

Now you get a raise to 100k. 100k - 40% tax = 60k. This is NOT how it works. You'd pay 33% on the 99k and then 40% on the extra 1k. Total taxes = 33k + 0.4k = 33.4k = 66.6k take home. You still end up with more.

Dropping yourself a tax bracket saves you nothing. It just means the government gets less money from you, but that's what you're doing when you donate anyways.

 

[silverpig]

Originally posted by: CPA

Originally posted by: Ns1
'grats OP, thanks to vi_edit and hypn0tik, you are now 2 steps closer to an epic fail thread!

Well, I'm about to bring it to the third and final step - I have never, ever heard someone claim that charitable contributions are a "secret" way of avoiding taxes, EVER!

Look up. The people saying you can drop yourself a tax bracket through charitable donations and incurring savings are basically saying that.

 

[Codewiz]

Originally posted by: silverpig

Originally posted by: CPA

Originally posted by: Ns1
'grats OP, thanks to vi_edit and hypn0tik, you are now 2 steps closer to an epic fail thread!

Well, I'm about to bring it to the third and final step - I have never, ever heard someone claim that charitable contributions are a "secret" way of avoiding taxes, EVER!

Look up. The people saying you can drop yourself a tax bracket through charitable donations and incurring savings are basically saying that.

I think you are also missing the point that charity isn't always about cash. I give items to charity all the time and gain the benefit and that can lower the tax bracket without every giving a single dollar to charity.

 

[Vic]

Originally posted by: spidey07

Originally posted by: vi edit
If you donate enough you might drop yourself a tax bracket or two making for significant savings.

I see common sense prevailing in this thread!

Nonsense!

 

[dullard]

Hold on here. Lets try a different scenario. I'm certainly no tax expert, so please correct me if I am wrong here.

Lets say you are married filing jointly and have $65,000 in taxable income after your adjustments. You'd be in the 25% tax bracket (only the last $1300 is in the 25% bracket, the rest is in lower brackets). Suppose $25,000 of that taxable income was long term capital gains. Since you are in the 25% tax bracket, you get a 15% tax on the capital gains resulting in $3,750 of capital gains tax.

But, now lets say that family donates $2000 to charity. It costs them $2000. But, they now are in the 15% tax bracket. That means they save 25%*$1300 + 15%*$700 = $430 from the deduction. Net loss so far: $1560. But there is far more to it. Since you are in the 15% tax bracket, long term capital gains are only taxed at 5%. That $25,000 investment that you sold now only gets a $1250 tax. You save another $2500!

In conclusion, the $2000 charity donation saved $430 + $2500 = $2930 in tax. Net GAIN of $930.

And don't think this scenario is that outlandish. Many people can use the 5% capital gains tax rate to have a huge income with very little tax. Just donate, temporarily stash money into retirement accounts, or pre-pay on real estate taxes and you can have a large income and very little tax. This is one major reason to NOT stop the taxation of capital gains that was a big political fad a few years ago.


As for me, I donate as part of spring cleaning. I get rid of good quality but no longer needed junk. It is cheaper to donate than to advertise for a garage sale or other form of auction. But the small tax savings is a nice bonus. Almost no work, saved money, and a less cluttered house = win.

 

[Vic]

For the wealthy philanthropists, charity is not about saving money. It's about control and especially that oh-so-important component of business success: networking. Of which taxes provide neither.

 

[SphinxnihpS]

As long as I can die in 2010 everything will be alright.

 

[mugs]

Originally posted by: dullard
Hold on here. Lets try a different scenario. I'm certainly no tax expert, so please correct me if I am wrong here.

Lets say you are married filing jointly and have $65,000 in taxable income after your adjustments. You'd be in the 25% tax bracket (only the last $1300 is in the 25% bracket, the rest is in lower brackets). Suppose $25,000 of that taxable income was long term capital gains. Since you are in the 25% tax bracket, you get a 15% tax on the capital gains resulting in $3,750 of capital gains tax.

But, now lets say that family donates $2000 to charity. It costs them $2000. But, they now are in the 15% tax bracket. That means they save 25%*$1300 + 15%*$700 = $430 from the deduction. Net loss so far: $1560. But there is far more to it. Since you are in the 15% tax bracket, long term capital gains are only taxed at 5%. That $25,000 investment that you sold now only gets a $1250 tax. You save another $2500!

In conclusion, the $2000 charity donation saved $430 + $2500 = $2930 in tax. Net GAIN of $930.

And don't think this scenario is that outlandish. Many people can use the 5% capital gains tax rate to have a huge income with very little tax. Just donate, temporarily stash money into retirement accounts, or pre-pay on real estate taxes and you can have a large income and very little tax. This is one major reason to NOT stop the taxation of capital gains that was a big political fad a few years ago.


As for me, I donate as part of spring cleaning. I get rid of good quality but no longer needed junk. It is cheaper to donate than to advertise for a garage sale or other form of auction. But the small tax savings is a nice bonus. Almost no work, saved money, and a less cluttered house = win.

I think your scenario is pretty atypical, and I would venture a guess that the majority of people don't come out ahead by donating to charity. And I'd like to think they are smart enough to realize that.

 

[dullard]

Originally posted by: mugs
I think your scenario is pretty atypical, and I would venture a guess that the majority of people don't come out ahead by donating to charity. And I'd like to think they are smart enough to realize that.

I will admit that it isn't something that everyone can do.

But, it isn't all that uncommon either. I used numbers slightly above the median household income for a married couple (it was $66,000 in 2005 before deductions when I used after deduction numbers).

I also used capital gains, which many people have from selling stocks to real estate to owning a small business. Many people have capital gains. It is a common practice if you own a small business to keep your salary low and pay yourself capital gains instead of paying themselves a high salary (you avoid medicare and social security taxes that way). Combined with lower capital gain tax rates and you have a double bonus.

So, take an income that applies to many people with capital gains that many people have and you get my scenario. You just have to make certain you donate enough money to stay in 15% or lower tax brackets.

Note: upon futher investigation, it looks like the capital gains tax is currently 0% for a couple years in the lower income tax brackets. I used 5% in the example above. That makes my scenario even more beneficial for the person who donates.

I did a quick Google search of "donate to eliminate capital gains tax" and got 250,000 websites that hint at or explicitly say what I typed. It is a trick that is well known.

 

[imported_Lothar]

Originally posted by: mugs

Originally posted by: dullard
...

I think your scenario is pretty atypical, and I would venture a guess that the majority of people don't come out ahead by donating to charity. And I'd like to think they are smart enough to realize that.

That strategy is more popular than you think it is.