The recent 2020 campaign discussions on billionaire taxation are bringing about an interesting discourse, but I wish someone would bring up problems with current philanthropy rules. It seems to me an easy step for someone to take would be to tighten the loopholes of big charitable giving.
This article does a great job discussing The Perils of Billionairre Philanthropy. It seems to me that charitable giving has surreptitiously become primarily a tax avoidance tool for the wealthy. A great stat from this article:
In the early 2000s, households earning $200,000 or more made 30 percent of all charitable deductions. By 2017, this high-earner group accounted for 52 percent of donations. And the total share of charitable deductions from households making over $1 million dollars grew from 12 percent in 1995 to 30 percent in 2015, according to IRS data.
Why the change? A couple reasons in my opinion.
- Donation of appreciated stock. A hidden gem of tax avoidance for anybody who has stock that has greatly appreciated. When you donate stock to charity, you get to take the charitable donation credit on the full value of the stock, without taking the capital gain. A couple great examples here. Bill Gates donated $4.6 billion dollars of stock to his foundation in 2017 without paying any capital gains. Lets assume his cost basis on that stock is near zero, and he is in the tax bracket that would pay 20% capital gains tax. By doing this, he was able to avoid paying roughly $920 million in capital gains in 2017. In 2018, Warren Buffet donated 3.6 billion in stock to the Bill and Melinda Gates foundation. Using the same math, I count that as $520 million avoided in capital gains taxes. That’s $1.5 billion in lost taxes in these two examples alone. Yes the money goes to philanthropic ventures, but is that equitable? Now.. it is a pain to donate stock to charity.. which leads me to #2.
- The rise in Donor Advised Funds. Donor advised funds are a great tool to give to charity for the wealthy (and upper middle class) to get a tax break. The game here is instead of giving directly to charity every year, every few years to give a lump sum to a Donor advised fund, which is essentially a pool of charitable money that can then be distributed to a different charity at any time. By giving a lump sum, people who do not hit the threshhold for itemizing their taxes can now get a charitable tax break. An Example: Lets say a married couple earns $16000 in taxes, and gave $3000 in charitable gifts in a year. Given the standard deduction is over $20k it makes sense to just take the standard deduction and not take itemized deductions, thus losing your charitable deduction. However, if instead of giving $3k to charity every year, you give $15000 to a Donor advised fund every 5 years. This gives you a $12,000 write-off every 5 years for charitable contributions because you can itemize that lump sum every 5 years. The kicker of course is, if you have appreciated stock, you can contribute your appreciated stock (see #1 above) to the fund to further leverage your contribution and take advantage of tax rules. Then, thoughout the year you dole out your money to your favorite charities from your balance in your Donor Advised Fund. These funds are very easy to set up and use – but how many people can take advantage of them?
It occurred to me that companies that have a 401k must follow strict IRS guidelines to ensure their plan is equitable by ensuring employees participate from all income levels. These charitable donation loopholes have been around for years, so they likely have bipartisan support because they encourage charitable giving. But how hard would it be to look at the above issues to make them equitable? Either change the rules to either cap tax free contributions, or change the rules so people from all income levels can take advantage of these tools.
