How to make the most impactful donation, in terms of taxes?
post by Katie S
This is a question post.
Hi, this is my first time posting.
I want to start donating 10% of my income to charity. However, this would be about $10,000 a year -- i.e. just under the standard deduction, such that none of it would be tax deductible. This seems ridiculously inefficient. I could be somewhat more efficient by clumping my donations -- e.g. donate $30,000 per 3 years, and get $18,000 of it tax exempt. But I want to do better.
My dad itemizes his taxes and is in a higher tax bracket than me (50% income tax). If he were to donate $20,000, he'd get $10,000 back on his tax return. So if I gave my dad $10,000 and he donated it, my donation would be literally twice as impactful as if I did it myself.
The question is, are there any legal issues with this?
- Giving the money to my dad: I know that the gift exemption is $15,000, so I could give my dad up to that without either of us noting it on our taxes. I do want him to do something in particular with the money -- is there any way that could cause it to not be considered a gift? It seems like in practice, many things things that would fall under the gift exemption do come with expectations (e.g. a parent giving their child money they intend the child to use for rent).
- My dad writing the donation off: Would there be anything preventing my dad from writing the donation on his taxes? There's something about how if you make a charity donation, you're not supposed to write it off if you receive or expect to receive a benefit from it. I'm not sure if this means "from the charity" or "from anyone" though. (It's also unclear my dad would be receiving any benefit, because this is dollar-neutral for him). Another example that this can't too literal -- I imagine some EA might want to take their new EA friends out for dinner to celebrate them starting the Giving What We Can pledge -- that seems like it shouldn't negatively affect anyone's taxes.
- What if my friends also want to maximize their donations by routing them through my dad? Is anything different because they aren't family members doing the giving? No one involved would be writing any legal contracts or anything.
Thanks in advance for any advice! I know taxes are boring for everyone, but I don't want to miss the opportunity to make my donations more effective.
answer by CarlShulman
) · GW
In the US, you might also invest the money in high risk high return investments that are more likely to increase a lot or decline to near zero over time (e.g. a leveraged ETF, to limit your downside to your investment), hold them for a year or more, and then sell them to realize losses or donate the appreciated securities if they rise. This has several benefits:
- If the investment declines, you get to take the loss and use it to reduce capital gains tax or deduct from ordinary income (up to $3000 a year) if you have no capital gains
- If it appreciates you get the regular tax deduction (you can give up to 30% of income in appreciated assets), and also avoid capital gains tax
- Because it is high risk, if it appreciates it is more likely to appreciate a lot, so when donated it will help you clear the standard deduction by a larger amount
- The elevated expected returns can increase the expected value of your donation quite a lot (i.e.. on average you will give a lot more dollars, even though they will be concentrated in a smaller fraction of the possibilities)
Don't do this before reading up extensively, but here are several discussions of the issues from an altruistic perspective.
https://forum.effectivealtruism.org/posts/g4oGNGwAoDwyMAJSB/how-much-leverage-should-altruists-use [EA · GW]
↑ comment by Wayne_Chang ·
2020-06-20T02:17:38.059Z · EA(p) · GW(p)
You should NOT be holding leveraged ETF's for long periods of time (i.e no more than a day or two). When held for a year, a 3x leveraged ETF will not deliver 3x the returns of the underlying index. In fact, it is quite possible given high current volatility, that the ETF delivers negative returns even when the underlying index is positive. For more info, see 'Why Leveraged ETFs Are Not a Long Term Bet.' Replies from: CarlShulman
↑ comment by CarlShulman ·
2020-06-20T20:42:19.414Z · EA(p) · GW(p)
Wayne, the case for leverage with altruistic investment is in no way based on the assumption that arithmetic returns equal median or log returns. I have belatedly added links to several documents that go into the issues at length above,.
The question is whether leverage increases the expected impact of your donations, taking into account issues such as diminishing marginal returns. Up to a point (the Kelly criterion level), increasing leverage drives up long-run median returns and growth rates at the expense of greater risk (much less than the increase in arithmetic returns).
The expected $ donated do grow with the increased arithmetic returns (multiplied by leverage less borrowing costs, etc), but they become increasingly concentrated in outcomes of heavy losses or a shrinking minority of increasingly extreme gains. In personal retirement, you value money less as you have more of it at a quite rapid rate, which means the optimal amount of risk to take for returns is less than the rate that maximizes long-run growth (the Kelly criterion), and vastly less than maximizing arithmetic returns.
In altruism when you are a small portion of funding for the causes you support you have much less reason to be risk-averse, as the marginal value of a dollar donated won't change a lot if it goes from $30M to $30M+$100k in a given year. At the level of the whole cause, something closer to Kelly looks sensible.Replies from: Wayne_Chang
↑ comment by Wayne_Chang ·
2020-06-26T14:29:52.210Z · EA(p) · GW(p)
Hi Carl, thanks for your response and for posting the links. I have now retracted my initial strong downvote of your comment.
I understand and am sympathetic of the view that altruists investing to donate should be a lot more risk-seeking than when investing to fund their own future consumption. My concern was entirely based on your recommendation to invest long term in leveraged ETF’s. I did not think this is a good idea because leveraged ETF’s can have realized returns that deviate substantially from its underlying index in a bad and unexpected way. Given current market conditions of elevated volatility, they are especially dangerous and more likely to have poor performance. The original EA post was about taxes and likely from someone with limited investment experience. I thought your advice could actually be harmful and lead to distressing investment results.
From your links, I saw that Brian Tomasik conducted simulations of leveraged ETF’s and concluded that altruists should consider them as an effective way to apply leverage. I did not review his work in detail but it does alleviate my concern of holding leveraged ETF’s over long periods. Still, as discussed in the links you shared, this should be done with caution and with awareness of the complicating role that other factors play (e.g. fees, choice of portfolio to lever, market conditions). If investors are unaware of these risks and complexities, there could be a backlash.
Since your comment now contains a cautionary disclaimer and the various links that clearly indicate the challenges involved with leverage, I think it's unlikely to be misinterpreted anymore. Thank you for your response!
answer by aaronhamlin
) · GW
This is a bit of a more complicated question with a number of options. If you like, you can contact me. firstname.lastname@example.org. I write a lot in this space: https://www.aaronhamlin.com/articles/#philanthropy
- The gift route is one idea. Though this comes with some complexity as you mention.
- You could invest the money and wait for longer than one year to be able to deduct the appreciation and the original investment.
- If you have a match through your employer, this is a great route.
- If you do clump your donations together, it's worth shooting an email to the charity you're giving to so they have a heads up. Make sure to let them know you're just considering this option and that you're not promising anything. This does two things: (1) it doesn't bind you to a gift if you change your mind for some reason and (2) it lets their philanthropy department know that you haven't dropped off in odd years. They may (or should) worry otherwise.
- A donor advised fund makes giving much easier once you start talking in the thousands and you're using stocks or other non-cash assets.
Also, the highest tax bracket is 37%. https://www.nerdwallet.com/blog/taxes/federal-income-tax-brackets/ [Note that this is only Federal. I should assume that you're talking state and Federal as Gordon pointed out.]
And congrats on your charitable giving plans!
answer by BrigidSlipka
) · GW
In terms of practical advice, Aaron has it covered. (As a fundraiser myself, please do let the charity know if you plan to bundle several years' giving into one).
But I have a more fundamental question: why don't you want to just pay your taxes?
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