Charitable giving is stupid.
Now that we have your attention, we better provide some context before someone sends an angry mob or the Ghost of Christmas Taxes over to our office. To be clear, we are not suggesting that supporting an organization you believe in is anything less than a great thing. Whether you are making a monetary donation at the end of the year, as is so often encouraged, or at any other time of the year, putting your money where your mouth is, so to speak, behind your favorite charity is always a worthy and applaudable practice.
When your intent is for charity, things are great; but when motives change, issues can quickly arise. If donations are driven solely by the potential tax benefits they could afford you, rather than to advance a cause you believe in, we suggest that you pause and contemplate the relative insanity of that gesture.
Think about it like this: as December rolls around, you realize by giving away $10,000 to your favorite 501(c)(3) non-profit, you could save $1500 to $2500 in taxes.
Sounds good, right? Who doesn’t like to save $2500? Except that you’re spending $7500 to save it. In short, you are falling prey to an age-old marketing technique like “buy two, get one free” or saving “50% off your next purchase with a purchase of $100 or more today.” Digging below the surface, you realize that “great thing” you envisioned or were promised actually offers you pennies on the dollar for what you’re spending.
Keep in mind that if you just paid that extra $2500 to the IRS, you would keep the $7500 balance in your own pocket. Seems logical enough — in what other scenario would you think it is a good idea to spend $10,000 for a $2,500 benefit? Likely none.
That’s not to say that giving $10,000 to your cause of choice is a bad idea. Just make sure that your maneuver is made because you believe in the organization, not because you want to save a buck.
Think of it like your friend who is always trying to persuade you to “invest” in gold. He’s so convinced, in fact, that he’s put all of his money into SPDR GLD shares. He’s completely convinced himself that owning gold is a great investment not realizing the real intelligence is in owning gold as a currency instead.
And that’s where the rub comes in. Yes, gold may have a long-term track record of value growth, but in the short term, that same value can be extremely volatile. Your friend doesn’t understand that the certainty he touts in regards to investment is misguided. Major currencies are as (or more) liquid than stocks, as they are traded 24 hrs a day as opposed to stock market hours. They are also traded on separate exchanges and that generally see more fluctuation. In short, the same is true for more wisely devising your charitable giving. If your goal is just to save money, then be smart about it — donate because you want to donate, not because you want a tax write-off.
Be careful, too, not to fall victim to the common misconception that making a charitable contribution personally, or through your business, means that you, as the owner, are able to apply the full amount of that donation against the tax liability for the business. For Sole Proprietors or S-Corps, the tax write-off is just passed through to the owner’s personal tax return. In the case of a C-Corp, charitable contributions are limited to 15% of taxable income as of 2020.
Your entire donation may not be tax-deductible either. When you donate, any benefits you receive must be subtracted from your donation. So those baseball tickets you won at auction, or those cookies you bought from the neighborhood girl scout, or that prime parking spot you got from donating to the local theater have to be backed out of your donation to determine the actual amount you can claim as a deduction.
And speaking of deductions, you’ll need to keep a detailed record of those deductions, entirely itemized, in order to take full advantage of those benefits. There are also limitations on the amount of deductions an individual or couple can make. Nerdwallet explains:
In general, you can deduct up to 60% of your adjusted gross income via charitable donations, but you may be limited to 20%, 30%, or 50% depending on the type of contribution and the organization (contributions to certain private foundations, veterans organizations, fraternal societies, and cemetery organizations come with a lower limit, for instance). IRS Publication 526 has the details.
- The limit applies to all donations you make throughout the year, no matter how many organizations you donate to.
- Contributions that exceed the limit can often be deducted on your tax returns over the next five years — or until they’re gone — through a process called a carryover.
- For the 2021 tax year only, you can deduct up to $300 per person rather than per tax return, meaning a married couple filing jointly could deduct up to $600 of donations without having to itemize.
- The CARES Act eliminated the 60% limit for cash donations to public charities.
So what is another logical way to minimize your tax burden, if that’s really your end game?
In short: make large purchases of items like heavy equipment or automobiles for which you can take accelerated depreciation. For tax purposes, accelerated depreciation provides a way of deferring corporate income taxes by reducing taxable income in current years, in exchange for increased taxable income in future years. Of course, even with this method you will need to ensure the purchases were something you had planned in the first place. Otherwise, you’re still falling trap to illogical methodology.
If you want to donate, but won’t qualify in any given year to itemize, consider a “charitable lumping” strategy, where you save your donations in a separate bank account, and every couple/few years, you make a larger deposit to a donor-advised fund. This allows you to take advantage of any potential tax benefits (albeit small), and be in full control of who you donate to, how much, and when.
And after all of that if you still want to give? Fantastic! Find your favorite 501(c)(3) non-profit and make a donation that suits your needs. Whether that’s your local religious organization, arts organization, or children’s or humanitarian charity, you’ll feel like the Grinch on Christmas — with a heart that’s grown three sizes knowing that your dollar is going to support a cause that means the most to you (tax benefit or not). Just be sure to follow the guidelines above, and work with your financial advisor to ensure you’re making the right moves at the right time to maximize your tax benefits.