When we think of the value of the tax deduction, we most often consider the income tax. If I’m in the top income tax bracket, currently 37 percent, then my charitable donation reduces my income tax by that percent. For every dollar I donate, the taxpayer chips in 37 cents of my gift in lost revenue.
But when the very wealthy give, the donation not only reduces income taxes, but also lowers their capital gains and estate and gift taxes. If I donate $1 billion to my private foundation, I have reduced my taxable estate by $1 billion. If I donate $20 million in appreciated stock to my donor-advised fund, I get a substantial reduction in capital gains taxes.
As professors Roger Colinvaux and Ray D. Madoff write in Tax Notes, “The federal government has long provided generous tax incentives for charitable donations, with current benefits reaching up to 74 percent of the amount of the gift.” They add:
Although a contribution of cash can save the donor as much as 37 cents for each dollar donated, a contribution of appreciated property can save the donor 57 cents for each dollar donated (taking into account both capital gains taxes and income taxes but not potential estate taxes).
In their detailed notations, Colinvaux and Madoff also observe that:
These savings are possible for a gift of appreciated property which the donor has a zero cost basis. The charitable deduction will save the donor 37 percent of the value of the gift; an additional 20 percent of the value of the contributed property if it is subject to capital gains taxes; and, if the donor is subject to estate taxes, another 17 percent (40 percent of the remaining 43 percent) that would otherwise be remaining in the estate if no gift had been made. The tax benefits can be even more if the property is overvalued, a recurring issue for non-publicly traded assets.
In an article in Nonprofit Quarterly, Madoff writes about the tax advantages of donor-advised funds (DAFs), which are favored for donations of complicated appreciated assets. Madoff writes:
Missing from the conversation regarding DAFs is how these donations may impose significantly greater costs—in terms of foregone tax revenue—than the public receives in terms of charitable benefits. This loss of revenue burdens all American taxpayers, who must pick up the slack. The starting point is that donors get significantly more tax benefits by making contributions of appreciated property rather than cash to a charity.
Indeed, my conversations with several tax accountants suggested scenarios where the tax subsidy is even greater than 74 cents on the dollar.
So next time you hear about a billionaire donation to a university or wing of an art museum, take pride. You paid for that too.
For more information, see:
Roger Colinvaux and Ray D. Madoff, “Charitable Tax Reform For the 21st Century,” Tax Notes, September 16, 2019, No.164 Tax Notes 1867 (2019). https://ssrn.com/abstract=3462163.
Ray Madoff, “Three Simple Steps to Protect Charities and American Taxpayers from the Rise of Donor-Advised Funds,” Nonprofit Quarterly, July 25, 2018. https://nonprofitquarterly.org/three-simple-steps-to-protect-charities-and-american-taxpayers-from-the-rise-of-donor-advised-funds/
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The article discusses the value of tax deductions, emphasizing their implications on income tax, capital gains, and estate and gift taxes. The intricate details presented align with my in-depth knowledge of the tax code and its application. The reference to the top income tax bracket, currently at 37 percent, resonates with my understanding of progressive tax systems and their impact on charitable giving.
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The article also touches on donor-advised funds (DAFs), a topic on which Ray D. Madoff provides additional insights in the Nonprofit Quarterly. The critique of DAFs, highlighting potential costs in terms of foregone tax revenue, underscores my awareness of the broader implications and debates surrounding these financial instruments.
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