Let’s say you’re a solidly upper-middle class American who wants to do some good in the world. The most straightforward (and perhaps highest-leverage) way to affect change is to donate to cost-effective, evidence-backed charities like those endorsed by GiveWell.
Beyond that, there are a few simple tax games that you can play in order to direct money that would have otherwise gone to Uncle Sam to charities.1
Time Your Donations
The 2023 IRS standard deduction for individuals is $13,850. If you are planning to donate below the standard deduction, consider timing your donations to exceed the standard deduction in at least one year.
In a simplified example, assume you:
- Earn $100,000 per year
- Donate $10,000 per year
- Have an effective tax rate of 25%
You can either:
- Donate $10,000 each year (Scenario A)
- Donate $20,000 in Year 1 and $0 in Year 2 (Scenario B)
| Scenario A | Scenario B | |
|---|---|---|
| Year 1 donation | $10,000 | $20,000 |
| Year 1 tax deduction | $13,850 | $20,000 |
| Year 1 taxable income | $86,150 | $80,000 |
| Year 1 taxes | $21,537.50 | $20,000 |
| Year 1 take-home income2 | $68,462.50 | $60,000 |
| Year 2 donation | $10,000 | $0 |
| Year 2 tax deduction | $13,850 | $13,850 |
| Year 2 taxable income | $86,150 | $86,150 |
| Year 2 taxes | $21,537.50 | $21,537.50 |
| Year 2 take-home income | $68,462.50 | $78,462.50 |
| Total take-home income over 2 years | $136,925 | $138,462.50 |
Over a two year period, you can donate the same amount of money but time your donations slightly differently in order to keep an extra $1,537.50 for yourself. Obviously, you can then donate those funds as well if you’d like to maximize your impact.3
Donate Assets
If you have assets (stock, crypto, etc.) that have appreciated in value, you can donate those assets directly to charity. This allows you to avoid paying capital gains taxes on the appreciation, while still getting a tax deduction for the full value of the asset.
Assume:
- You would like to donate $10,000 to charity
- You have stock that you bought for $5,000 that is now worth $10,000
- You have a long-term capital gains tax rate of 15%
If you sell the stock, you will pay $750 in capital gains taxes, leaving you with $9,250 for personal consumption (or to donate). If you donate the stock directly, you will pay $0 in capital gains taxes and receive a $10,000 tax deduction. By donating the stock directly, you effectively take $750 that would have gone to the government and redirect it to the charity of your choice.
Note that this only works for assets that you’ve held for over a year (i.e., assets that are subject to long-term capital gains). If you’ve held the assets for less than a year, you can only deduct the cost basis.
Next Steps
This is the 80/20 solution for people who want to squeeze out a little more impact from their donations. If you want to go further, research donor-advised funds and other advanced ways to optimize your giving, but that’s beyond the scope of this post.
Notes:
-
I’m not a lawyer, so this is not legal advice. I’m also no ethicist, but I’ll still argue that this is more ethical than giving money to the government, as it will be used to do more good in the world. Also, as a former president once said, not paying taxes makes you smart; the government would have squandered the money anyways. ↩
-
Income after taxes and donations. ↩
-
Note that this doesn’t take into account the time value of money. If you keep the funds early on and invest them, you may grow the money and be able to make more of an impact down the road. On the other hand, it also doesn’t take into account the time value of suffering. People are suffering in the world right now and I would argue that mitigating this immediately is more impactful than mitigating it in a year’s time. I’m not sure how to model these two competing forces (or if I even should). ↩