17

The title of this question is hopelessly vague, but here is what I'd like to know:

I've always heard that even if you don't have much money, you should give to charity. It is tax-deductible. I'm not excellent at economics, but I was wondering two things:

  1. What does it mean for something to be tax-deductible in terms of the economy of the United States? Does it mean that the $50 I donate to the ASPCA will not (via taxes) go to other public works and such? Does this mean that I would be giving this $50 away anyway, but if I donate it then the money will be given right to the charity instead of spread out to many other places?

  2. More personally, if I do not make much money, would it be worth it (financially) to give to charity? Are there any advantages or disadvantages?

If you don't want to answer both, ignore the first one.

13

For many people, giving to charity will have minimal effect on their taxes. Non-profits love to attract donations by saying the money is tax deductible, but for most people, it doesn't work out that way. You will only itemize deductions if they exceed your standard deduction.

The IRS allows you to either "itemize" your deductions (where you list each deduction you can take) or take the "standard deduction". Consider a married couple filing jointly in 2011. Their standard deduction is $11,400. They are in the 28% tax bracket.

They donate $100 of old clothes to the Goodwill, and are looking forward to deducting that on your taxes, and getting $28 of that back. If that's their only deduction, though, they'd have to give up the standard deduction to take the itemized deduction. Not worth it.

Suppose instead they have $11,500 of deductions in 2011. Now we're talking, right? No. The tax impact of itemizing is only $28, since they only exceeded the standard deduction by $100. The cost of having a tax accountant fill out the itemization form probably offsets that small gain. There's also all the time that went in to tracking those deductions over the year. Not worth it.

Tax deductions only become worthwhile when they significantly exceed the standard deduction. You need some big ticket items to get past the itemized deduction threshold. For most people, this only happens when they have a mortgage, as the interest on a residence is deductible.

Folks love to suggest that having a mortgage is a good deal, because the interest is deductible. However, since you have to exceed the standard deduction before it makes sense to itemize, it's not likely to be a big win.

For most people:

  • if you don't have a mortgage, you'll never itemize deductions.
  • if you have a mortgage, you can deduct your donations, but don't count on getting your interest back.

TL;DR: Give to charity because you want that charity to have your money. Tax implications are minimal; let your accountant sort it out.

Disclaimer: I am not an accountant.

11
  1. If something is tax-deductible in the US, it means that, in the eyes of the Internal Revenue Service, you effectively didn't earn that money. Within restrictions, your adjusted gross income, which is the income that your tax is calculated on, is reduced by the amount of your tax deductions. In the case of the ASPCA, they've jumped through the appropriate hoops to become a 501(c)(3) organization, which, among other things, means that donations to them are tax-deductible by the donor (a) if they itemize, and (b) if they haven't reached a donation cap. That's the carrot that encourages donations to these organizations. There are restrictions, meaning that there can be only certain types of privileges or exchange between the donor and the organization. Essentially, it has to be a donation, and not a purchase of substantial goods or services. Your donation to these kinds of organizations doesn't hurt their funding elsewhere, or shouldn't.

  2. As mentioned above, if you don't itemize your deductions, you won't gain any extra tax savings from the donation. (You shouldn't itemize if you're better off taking the standard deduction.) Having said that, though, please give whatever you're led to give, after considering all of the ramifications (financial and spiritual). The tax deduction is only a subsidy; the IRS doesn't "pick up the whole tab" but only refunds a fraction to you in the form of tax savings through itemized deductions. If you don't feel you have the money, then donate your time. It might be more needed anyway!

4

Charitable donations can be deducted from your income, and in that way make your taxable income lower, hence lower taxes. That's the meaning of "tax deductible".

As to "if I donate it then the money will be given right to the charity instead of spread out to many other places" - taxes are being used by the government based on its own decisions (presumably made by elected officials thus representing the will of the voters). Charities use the money based on their defined goals. Giving money to a charity will ensure it is used for the specific goal the charity declared, and that's the way for you to funnel money to the goals of your preference/choice. For example, you can donate money to your temple, orphanage around the corner, or the gay rights organization. Or anti gay, for that matters. Your money will be spent on the goals of your choosing.

Re advantages - charitable donations are used by the rich folks to avoid paying taxes on their income (because they're deductible), so someone might donate money to places they use themselves (like the temple/church for example, or the school where the kids go, or politician which will "objectively" choose someone's business for a big government contract, etc etc). For "ordinary" people it's a way to reduce the taxable income and divert the money to the specific goals of their choice. For example, donating $100 to Red Cross Japan Tsunami relief fund, will reduce your taxable income by $100, and total taxes by $28 (assuming you're in the 28% bracket), thus the $28 will go to the specific goal your choose instead of the general taxes.

  • So, one half-question to see if I've got economics straight: my giving, say, $100 to some specific charity means $100 that won't be able to be spread out via the government to different things? So, for example, if I give $100 to some charity, then, ultimately, some public funded place like a park won't get some fraction of a cent from the money I would have otherwise paid to taxes? – james Jun 3 '11 at 3:46
  • 6
    Not exactly, if you give $100 to some specific charity - it will be $100 less of your income to be taxed. So if your tax rate is (for example) 10%, then by giving $100, you'll save $10 from being spread out via the government to different things - the amount of tax you would pay for the $100. In this way, the government basically participates in your donation. – littleadv Jun 3 '11 at 4:11
  • @james Public works such as parks are paid for by state and local governments out of state/local income, sales and property taxes. Also keep in mind that since the mid 70's, Federal expenditures are only loosely associated with revenue collections. The US government in 2011 will probably spend around $3.7 trillion and collect around $2.1 trillion. – duffbeer703 Jun 3 '11 at 12:37
3

If I donate $10,000 to charity then I can deduct that $10,000 from my income and not pay income taxes on it. So if I make $50,000 a year then I will only pay income taxes on $40,000 instead of $50,000 since I donated $10,000 to charity. This is what is meant when charity contributions are said to be tax deductible.

Don't feel like you have to donate to charity. You owe no one anything. You do more for others by working (assuming you work in the private sector).

If you know of someone personally that is in need of aid then you could give them some help directly. I find this more effective then blindly dumping money in a bureaucratic, inefficient charity. I also find there are very few people in need of charity.

Personally, I think charity donations are a way for people to feel good about themselves. They rarely care if their donations are effective.

  • One of the things that got me interested in this was something like your second paragraph. Having just read some Austrian economics book, it seemed like my money "had to go somewhere anyway", and I was curious as to how it would be used in the case I gave to charity as opposed to if I did not. – james Jun 3 '11 at 2:57
  • @james Say you take your $10,000 and buy a fancy home theater and computer. 3-5% go to the retailer, 10-40% to the trademark and patent holders, 10-30% to the chinese factory, 20-40% to a mining company probably in Australia or China and 10-20% to the Saudis and the plastic manufacturer. – duffbeer703 Jun 3 '11 at 12:32
3

A simpler view is that tax deductions allow you to give to charities from your gross salary, not your net salary.

2

The intention of making the charitable contributions tax deductible is to provide an economic incentive to contribute to organizations which tend to improve the general welfare of the community. Deductibility impacts government revenue generation, but has positive impacts that probably offset that loss by encouraging more giving by folks subject to high income tax -- particularly small business owners.

Unless you own a home and have a mortgage you may not have enough deductions to get any financial benefit from charitable contributions. Charitable contributions are only deductible when your deductions exceed the standard deduction.

For most people, charitable contributions are a way to support something that you care about, and the tax benefits are a secondary benefit, or a way to enhance their own giving.

2

If you don't have much money, and more important, don't itemize, donations are strictly between you and your karma. If you itemize (from a combination of mortgage interest, property tax, and state tax), by donating used goods, you can get some return on your taxes, and feel good about yourself.

When I donate at charity time (December for me) I don't look at every $1000 check as a $250 benefit back to me, although that's the effect. I care deeply about the charity's cause and have personally visited each of them. You want to drop $50 to some huge agency that's funding cancer research? No objection. But when I visit a Veteran's Center or School for the Blind, I can see the good work my money is doing.

0

I'll answer your second question: it depends what your charity is for.

There are two types:

i) Emergency (i.e. to respond to environmental or social disasters where it acts a bit like an insurance policy); ii) Development (i.e. where the intention is to subsidise something missing in the local economy);

A lack of insurance is certainly a problem for people who lose their homes and livelihoods to disaster. Your donations can go far.

As for development aid:

"We find little evidence of a robust positive correlation between aid and growth," write two ex-IMF economists, Raghuram Rajan, who stepped down as IMF chief economist at the end of 2006, and Arvind Subramanian, who left the IMF this year.

"One of the most enduring and important questions in economics is whether foreign aid helps countries grow ... There is a moral imperative to this question: it is a travesty for so many countries to remain poor if a relatively small transfer of resources from rich countries could set them on the path to growth ... But if there is no clear evidence that aid boosts growth, then handing out more money makes little sense," they conclude.

I do somewhat further in declaring that charity is equivalent to trade dumping. By artificially lowering the real cost of a particular good it ensures that there will be no local investment in that good. Free clothes to Africa has destroyed the local textiles industry. Free doctors has resulted in more African doctors in New York than in the whole of Africa.

So decide where your charity is going: emergencies or development? Then decide what you can afford. But your first investment should always be in yourself. If by making use of that investment you can benefit the economy and keep others around you employed and productive you will achieve far more.

  • There's an important distinction between foreign development aid, which is really an arm of diplomatic policy, and domestic development aid, which is filling in gaps left in our quasi-free market economy. – duffbeer703 Jun 3 '11 at 12:28
  • Perhaps, but the differential between charity as insurance (Hurricane Katrina) and ongoing development (subsidies, aid packages, drugs education programs) is the same. Of course, if you don't expect to fix the problem then charity really is the only solution. – Turukawa Jun 3 '11 at 14:09

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