Charity “tax write off”

The title of this post kind of rubbed me wrong. It’s from a list article derived from a Reddit post called “What screams ‘pretending to be upper class’?

Here’s the question: do the wealthy donate money because of the tax write off, or would they still donate money to charities even if that write-off was not available?

The charitable deduction requires someone to itemize. This means that to actually get the benefit of itemized deductions, you need to have enough deductible expenses to overtake the standard deduction. (Under the CARES Act of 2020, everyone can write off $300 in charitable giving directly, with any remaining charitable requiring itemizing to deduct.)

Now that’s easy for the wealthy. The standard deduction for married filing joint, the highest standard deduction, is about $25,000 (as of this writing). The donation need not be cash either. Donating stock to a hospital to give them residual income from dividends is allowable and comes with additional tax benefits beyond the itemized deduction. Plus charitable expenses are not added back in to calculate the alternative minimum tax either. So there are plenty of tax benefits for the wealthy to make charitable donations.

It’s one of the reasons the United States is, bar none, the most charitable country in the world, and has been for years. When tax policies incentivize giving away money, people will give money to whatever cause(s) they want to support. And the benefit of charities versus the government is simply that the charities have to convince people to hand over money while the government can just take whatever it wants, and print bonds to cover whatever doesn’t pay the bills.

But note as well that this is a tax deduction, not a tax credit. This means it’s used to reduce a person’s adjusted gross income (AGI) and doesn’t directly offset their overall tax liability for the calendar year. And the limit, currently suspended under the CARES Act, on how much can be deducted is 50% of the person’s adjusted gross income in general, with the limit being 30% for gifts to certain categories of organizations. So for a wealthy person with an AGI of $1 million, the most they can generally deduct is $500,000.

But one stupid obvious point about the charitable deduction many seem to forget: it requires the wealthy to give up some of their wealth! I’m actually surprised how many people seem to not understand this! Along with the idea that everyone tries to minimize their tax liability where they can, or at least scoffing at it only when talking about the wealthy doing that, calling it “dodging taxes” or even “tax evasion”, which has a specific definition in Federal law, so basically alleging that the wealthy are all felons.

I’ve pointed this out in a previous article talking about several tax deduction options for the working class. And in talking about the adoption tax credit, I said this:

But the tax benefits only occur after you’ve shelled out who-knows-how-much money to adopt the child, meaning they do not and cannot make the process more affordable. Again, it is analogous to a friend or family member saying they’ll help you out by reimbursing part of your out-of-pocket expenses after you’ve already incurred them.

Tax deductions are a huge catch-22. Reducing your tax liability requires you to give up some of your money or wealth. Under the current limit suspension on the charitable tax deduction, a person would need to give away enough money or wealth to completely offset their AGI to eliminate their tax liability.

Which is rather strange that people complain when the wealthy actually make tax write-offs.

It’s as if people don’t realize that the wealth being given away to make the tax write off is MORE than the amount of money they’re saving on taxes! Going on the example above, if a person with an annual income of $1 million gives away half that, thereby cutting their tax bill effectively in half, the amount they save on taxes is only about 25% of what they gave away.

It’s almost like people think giving money to the government is a nobler cause than giving it to a charity that will directly help people. But given the left’s disdain for charity, I wouldn’t be the least bit surprised if that is the actual thought process.