Donation Tax Deductions

For ethics in the real world - bioethics, law, effective altruist outreach etc.

Donation Tax Deductions

Postby Brian Tomasik » Sun Mar 01, 2009 1:51 am

See also: Advice for Donors with Capital Gains

One way in which utilitarians can make a big difference is to make a lot of money that they can donate. There's a good argument to be had over whether utilitarians should donate or invest under various circumstances: If you know what types of projects are most cost-effective, then donating now captures social returns on investment due to snowballing of the changes you bring about. On the other hand, if you're gathering lots of new information that drastically changes your assessments of the relative cost-effectiveness of various projects, it's probably better to hang on to the money for a few years.

One argument in favor of donating now is that it allows you to take advantage of tax deductions. Since there's a limit on the tax deductibility of donations to private foundations of 30% of AGI and to public charities of 50% of AGI, it may not be the best idea to hoard up one's wealth for many years and donate it all at once -- there's a tax benefit to donating smaller chunks over time. That said, charitable carryover deductions mean that if you donate more than the limit in one year, you can carry over the excess for up to 5 subsequent years. In addition, you might overcome the difficulty of not knowing right now which causes are most cost-effective by donating not to a particular charity but to a donor-advised fund or private foundation, which will allow you to choose the recipient later on. [Edit on 24 June 2012: I now have a donor-advised fund of my own. Feel free to contact me if you'd like help figuring out the details. Mine was surprisingly easy to set up.]

In the remainder of this post, I raise some points to consider when deciding whether to donate to such a vehicle for the tax benefit or whether to hold onto one's wealth privately. I'm curious to hear any information or suggestions others might have.

Reasons to favor donating to a fund:
  1. The tax benefit is the main one. If your marginal income-tax rate is, say, 25%, then avoiding taxes on your donation multiplies the amount of donation you can eventually make by 4/3 (since you can donate 100% instead of 75% of income that you don't need for living expenses). If your marginal tax rate is 33%, it multiplies the amount of your donation by 3/2.
  2. There's a small chance that you'll become more selfish with age and decide not to donate the income after all. You might also tend to spend slightly more than necessary on personal purchases if you have lots of money sitting around in your private possession. I personally don't give a whole lot of weight to these factors, because I can't imagine myself caring less about helping to prevent suffering. But people sometimes do strange things, and dispositions do change over time, so I would probably be overconfident to neglect this entirely.
  3. Having money ready to be donated might buy you more influence when approaching charities and encouraging them to favor more cost-effective projects, because they know you're serious about eventually giving away large amounts (possibly to them).

Reasons favoring owning the wealth privately:
  1. You may legitimately come across uses for the money that are better than donating to a charity. For instance, you might decide to found a startup with a good shot at high returns, and you want to use your own private wealth to get it off the ground without depending as much on VCs. Or you might decide that your time is better spent doing research or activism on utilitarian issues than making money to pay others, in which case your wealth would be best spent paying for your living expenses while you do those other projects. (In effect, you would in that case be donating to a charity whose purpose was to have you do your important work, only without the bureaucracy of 501c3 status.)
  2. Along similar lines, there might be small, informal projects that would be cost-effective to fund. For instance, you might want to pay a researcher a few thousand dollars to look into a question on your behalf. Or you might want to fund some off-the-wall project for which no public charity exists.
  3. Foundation donations can't go toward political lobbying, so if you ultimately decided that such an approach was most-cost effective, you'd be out of luck unless you could find a way around it (e.g., finding someone to make those donations for you, in return for your donating to that person's choice charity).
  4. Foundations are required to disburse at least 5% of their value per year, so the problem of donating to suboptimal causes due to poor information isn't completely avoided.

A big question with the arguments against is, To what extent can the causes that you would want to fund with small private donations be done through a public charity? If you want to donate to cause X, would it be possible to, if necessary, start your own charity do cause X and then have your fund / foundation donate to that charity? (Are there legal restrictions against funding "your own" charity?) Would the bureaucracy required in setting up such an arrangement outweigh the tax-saving benefits?

--------

Update from 20 Feb 2013:

I called Fidelity Charitable, my donor-advised fund, to ask whether it's allowed to donate to your own charity. Here "your own" could mean (a) one that you founded, (b) one for which you sit on the Board of Directors, or (c) one from which you receive a salary. I was told donating to your own charity is in fact allowed as long as (1) it's a 501(c)(3) charity that passes the public-support test, and (2) you don't receive a personal benefit from the donation. (2) requires that the donation doesn't go toward your salary. Therefore, it seems you can't just donate to yourself to pay your own cost of living while working at your charity.
Last edited by Brian Tomasik on Sat Jan 02, 2010 7:37 am, edited 4 times in total.
User avatar
Brian Tomasik

 
Posts: 1085
Joined: Tue Oct 28, 2008 3:10 am
Location: USA

Re: Donation Tax Deductions

Postby RyanCarey » Tue Mar 03, 2009 8:21 am

Regarding creating your own charity, I imagine it would require an immense amount of work to achieve tax-exempt status. Even if you're trying to promote happiness through relatively uncontroversial avenues, I imagine it would be hard to know where to even start with the paperwork. It'd be interesting to hear from someone who's actually gone down this path. (Toby Ord perhaps)

You've made a really strong summary of a serious issue. These are questions that financially stable utilitarians eventually have to ask themselves.

Some utilitarians will be swayed to donate over 30% of their income whereas others will instead retain 95% of their income, and it's possible that neither group is doing wrong. Different individuals have different skills and different needs. Of course, some of us will slightly muck up our estimates, but such is life. I know that in overwhelming likelyhood, I'll be tempted to enter into private enterprise of some sort. It's something that excites me, and furthermore, I think I might just have what it takes to be effective. Equally, I understand that those who don't wish to use money to make money are often right to donate what they have.
You can read my personal blog here: CareyRyan.com
User avatar
RyanCarey
Site Admin
 
Posts: 716
Joined: Sun Oct 05, 2008 1:01 am
Location: Melbourne, Australia

Re: Donation Tax Deductions

Postby Arepo » Tue Mar 03, 2009 10:00 pm

Interesting post, thanks Alan. A couple more factors that might be worth considering:

1) Giving money is almost certainly habit forming. I think this is different to your second point, in that giving money now probably reduces the risk of your becoming a miser as you age.

2) Another option is ethical investment. This tends to give a reduced ROI (I have an ISA with Triodos, which last time I looked was making about 2% per year, vs about 4.5% in the most generous alternative I could find), so putting your money in them is already comparable to a donation in that you have less of it.

I wish I knew more about the investment option; presumably its effectiveness varies widely between organisations. I like Triodos' 'positive screening' approach (investing only in groups that seem to be actively trying to improve society, rather than those which don't obviously harm it), but I imagine that it's difficult to find reliably profit-making companies that have as good an impact as the best charities. They also seem to spend a bit on art and culture projects which, though I support them in theory, must be very inefficient as a means of increasing net welfare.
"These were my only good shoes."
"You ought to have put on an old pair, if you wished to go a-diving," said Professor Graham, who had not studied moral philosophy in vain.
User avatar
Arepo
Site Admin
 
Posts: 1104
Joined: Sun Oct 05, 2008 10:49 am

Re: Donation Tax Deductions

Postby Brian Tomasik » Tue Mar 03, 2009 11:46 pm

Socially responsible investing is an interesting question. In general, I agree with Givewell's point that "investing in evil" makes practically no difference, so that negative screening is probably not worth it (especially if it implies higher expense ratios for your mutual fund). But positive screening may be different. In addition to a positive-return investment like Triodos, there are also 0% return investments like Kiva, which provides micro-loans.
User avatar
Brian Tomasik

 
Posts: 1085
Joined: Tue Oct 28, 2008 3:10 am
Location: USA

Re: Donation Tax Deductions

Postby utilitymonster » Sun Jan 24, 2010 6:52 pm

Carryover is 5 years in the US. So if you make 50k a year and you made a 125k donation one year, you could write off 25k for each that year, and 25k for each of the next five years (assuming you still made 50k those years, and you didn't give anything extra). But if you gave 150k, there would be 25k that you never get to write off. In such circumstances, it may be advisable to give 125k now, and another 25k next year. Of course, if you plan to give 50% of your AGI every year, then tax avoidance wouldn't give you any reason to wait.

If you want to invest and wait, there is a good reason to put 50% of your AGI in a DAF each year, since that way you'd avoid a lot of taxes. This consideration could, of course, be outweighed by other considerations that were identified above.
utilitymonster

 
Posts: 53
Joined: Wed Jan 20, 2010 12:57 am

Re: Donation Tax Deductions

Postby ToUnderstand » Sun Nov 13, 2011 4:31 am

Many apologies for the somewhat late response, but I was curious to know what would even be worth deducting. I make donations fairly often and I'm an independent contractor. However, they're sporadic donations and I don't really keep track of said donations. I'd say, if I accumulated all of those donations, it would equal out to about $500. Is that even worth "deducting" or will it only take off a few bucks? Just curious! Thanks for allowing me to chime in! :)
Trisha
Can payroll software be used to calculate tax deductions?
ToUnderstand

 
Posts: 1
Joined: Sat Nov 12, 2011 8:28 pm

Re: Donation Tax Deductions

Postby Brian Tomasik » Sun Nov 13, 2011 5:32 am

ToUnderstand wrote:if I accumulated all of those donations, it would equal out to about $500. Is that even worth "deducting" or will it only take off a few bucks?

Hi Trisha. If you itemize your tax deductions, then the donations can be taken off your income dollar-for-dollar. So if your marginal tax rate is, say, 25%, then deducting $500 in donations would save you $125 on taxes. If you don't itemize, then you won't get the savings.

I do my taxes with TurboTax, and they have an "ItsDeductible" program that allows you to enter donations throughout the year and then import them at tax time, which reduces the hassle. Another option is to give bigger chunks of donations to fewer organizations, so that you achieve the same amount of donating with less paperwork. :)

Best wishes on the future donations! (Shamless plug: I recommend Vegan Outreach.)
User avatar
Brian Tomasik

 
Posts: 1085
Joined: Tue Oct 28, 2008 3:10 am
Location: USA

Re: Donation Tax Deductions

Postby Pablo Stafforini » Sat Dec 17, 2011 1:48 pm

The link to Gaverick Matheny's great post on donating vs. investing is dead (it appeared in the old Felicifia forum, which is no longer online). Fortunately, one can still access it using the Wayback Machine; you will find it here.
User avatar
Pablo Stafforini

 
Posts: 178
Joined: Thu Dec 31, 2009 2:07 am
Location: Oxford

Re: Donation Tax Deductions

Postby Brian Tomasik » Sun Dec 18, 2011 4:56 am

Pablo Stafforini wrote:Fortunately, one can still access it using the Wayback Machine; you will find it here.

Nice! I seem to recall further discussion on that thread, so maybe the WayBack snapshot cuts it off, but at least we can see Gaverick's original post.
User avatar
Brian Tomasik

 
Posts: 1085
Joined: Tue Oct 28, 2008 3:10 am
Location: USA


Return to Applied ethics

Who is online

Registered users: Google [Bot], Google Feedfetcher

Bookmark and Share
Site Meter