How do charitable donations work?

The Paris Olympics opening ceremony is tomorrow night. From polluted rivers (💩) to no A/C for the athletes, this is a relatively mild pre-news cycle compared to previous Olympics. 2022: China asked Russia to delay its invasion of Ukraine until after the Olympics (unofficial). 2020/2021: Covid. All things considered, a poopy river and hot athletes is nothing!

Charitable donations are gifts of cash or property to non-profit organizations to aid in their goals with no quid pro quo. You can deduct your adjusted gross income (AGI) by up to 60% with charitable donations. This means if you have $100,000 in adjusted gross income, you can lower your taxable income to $40,000 if you donate $60,000. That’s a pretty unrealistic example, but you get the point.

We’ve previously summarized all the itemized deductions, but charitable donations are by far the biggest possible deduction. They are also the easiest deduction you have 100% control over. There are a few more steps involved to get the mortgage interest deduction…

You can donate cash, gifts, property, and even stocks. Each of these categories has different rules on how much of it you can deduct. You can deduct between 50% to 20% of your AGI for property, art, or other gifts. If you give a stock that has appreciated (capital gains), you can only deduct 30% of your AGI. To deduct up to 60%, you have to donate cash.

If you are at a charity auction and buy some sweet court side seats to watch Caitlin Clark drain a long three, you can only deduct the amount you purchased above market value for the ticket. If the market value of the ticket is $1,000 and you pay $1,500, then your charitable donation is $500. 

So who can you give your money to? Any 501(c)(3) non-profit organization can receive tax deductible gifts. Who are these organizations? In the IRS’s own words: organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes and that meet certain other requirements are tax exempt under Internal Revenue Code Section 501(c)(3). There are a few other exemptions for political organizations and private foundations but 501(c)(3) covers 98% (beer math) of the organizations. 

If you don’t trust the Volcano Relief fund that your friend told you about, you can search for the organization here before making a gift to impress your date. If you don’t understand that reference, please watch more Seinfeld.

Once you’ve donated, you report your donations on Form 1040, Schedule A. Regardless of how you file, H&R Block, Turbo Tax, or an accountant, it is very easy to report charitable donations. Just make sure you keep your receipts. 

Because we have income brackets, the tax deduction helps the highest earners far more than those in lower income brackets. This makes some people claim it is just a write off for the rich.

A married couple with an AGI of $80,000 is paying 12% federal taxes on their income from $22,001 to $80,000 ($57,999). If they donate $5,000, they would save $600 in federal taxes. 

A married couple with an AGI of $751,750 is paying 37% on their income above $693,751 ($57,999). So, a $5,000 donation from this couple would save them $1,850 in federal taxes.

However, to understand the full picture, let’s look at their tax bills without the donation. Each married couple made $57,999 in their highest tax bracket. Couple A pays $6,960 on their last $57,999 of income. Couple B pays $21,460 on their last $57,999. This doesn’t include all the taxes they pay up to $693,751. Those who say it is a tax write off for the rich don’t like to acknowledge that it benefits the rich more because the rich are in higher tax brackets. 

But remember, if your total itemized tax deductions don’t exceed the standard deduction ($14,600 for single filers and $29,200 for joint filers), don’t waste your time trying to itemize when filing taxes and just take the standard deduction.

So why does the government incentivize charitable deductions? This argument goes all the way back to World War I and the start of income tax.

In order to pay for World War I, Congress enacted several different income tax laws (their legality is still up for debate). The Tariff Act of 1913 added a 7% top tax rate to “the wealthiest Americans” according to the Congressional Research Service. Then, the War Income Tax Revenue Act of 1917 increased that top tax rate to 67%... talk about a shock. Congress worried that the wealthy would cut charitable donations to cover their new tax bill. To prevent this, Congress authorized a 15% tax deduction for charitable donations. 

Throughout the years, the tax deduction percent has slowly increased. The tax law passed in 2017 increased the percentage to 60% until 2025. So does this even work?

Shockingly, there are many competing views. A Stanford study found that the long term effects of removing or reducing tax deductions may lower charitable donations by 25%. This varied greatly between the charitable organizations, though. Donations to hospitals and universities may decrease as much as 65% due to increased taxes; whereas, donations to religious institutions only decrease by 10%.

Whether or not it encourages more giving, I support the charitable donations deduction. I realize there are many horrible organizations and people that abuse this system. However, if we are going to fight about tax “loopholes,” there are dozens of other ways that the ultra wealthy use to legally not pay taxes. Ways that are not possible for everyday Americans. The deduction that very easily allows every American to reduce their taxes while helping an organization/people/animal/cause is not the hill to die on.

Call to Action

Do you have donations built into your budget? As you grow your net worth, giving more money and time to causes you’re passionate about can be very rewarding.

What We’re Reading/Listening To:

Podcast: Armchair Expert: Phil Elwood. This is an insanely interesting podcast about the very dark world of public relations for people, families, and countries with questionable morals. Shout out to Jules for the recommendation.

Debrief on Deck

Next week, Mike is going to debrief July. It’ll probably be a short letter… not much major news has happened…

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on social media (X (formerly Twitter) and Instagram).

Until then, stay the course.

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