Author Topic: Would you use a tax-advantaged charitable account?  (Read 2908 times)

CheapScholar

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Would you use a tax-advantaged charitable account?
« on: January 22, 2017, 03:04:11 PM »
Hello fellow mustachians.  Tax time is approaching and it has got me thinking.  Could America benefit from a tax-advantaged charitable account option?  My vision of this is that it would work similar to a health savings account.  Employees could elect to have money taken out of each pay check (pre-federal tax) and have it placed in an account.  Then individuals and families could make well thought decisions about their philanthropy.  This idea came to me because I do not itemize, and I take the standard deduction, so there really aren't tax incentives to give.  Of course, I still do give, but my thinking is such a charitable account option would inspire others to give and to be more scientific about their philanthropy.  I work in philanthropy, so this might also be why the idea popped in my head.

I haven't thought about the appropriate maximum amount from a policy point of view.  My thinking is that if a taxpayer can shelter 18K from federal tax for a 401K, maybe a few grand per year for a charitable account would be appropriate?

Thoughts?  Would this appeal to you?  Would it inspire giving among Americans?

chasesfish

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Re: Would you use a tax-advantaged charitable account?
« Reply #1 on: January 22, 2017, 06:45:50 PM »
Its an interesting thought.  It might marginally increase donations, but the lobbying dollars for charities focus on the big ticket items (direct donations from retirement accounts).

One question for you though, since you don't *normally* itemize, have you thought about using a charitable fund through Vanguard or Fidelity ($5,000 min with Fidelity) and making your next 5,10,15 years worth of donations in one lump sum and taking the deduction?   You can also donate appreciated stocks through this process.

CheapScholar

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Re: Would you use a tax-advantaged charitable account?
« Reply #2 on: January 22, 2017, 06:58:43 PM »
Its an interesting thought.  It might marginally increase donations, but the lobbying dollars for charities focus on the big ticket items (direct donations from retirement accounts).

One question for you though, since you don't *normally* itemize, have you thought about using a charitable fund through Vanguard or Fidelity ($5,000 min with Fidelity) and making your next 5,10,15 years worth of donations in one lump sum and taking the deduction?   You can also donate appreciated stocks through this process.

I've thought about that.  I'm a professional fundraiser myself so I know the ins and outs of what you're talking about.  5K would be a stretch for me financially.  But if I had an option to give 1K in a pretax mechanism that would excite me. 

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Paul der Krake

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Re: Would you use a tax-advantaged charitable account?
« Reply #4 on: January 22, 2017, 07:32:12 PM »
My charitable contributions in the accumulation phase are next to zero.

A tax-advantaged account would essentially be a giving bonus of whatever my marginal tax rate happens to be that year. That's not enough to make me reconsider my giving strategy.


arebelspy

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Re: Would you use a tax-advantaged charitable account?
« Reply #5 on: January 22, 2017, 08:05:35 PM »
This is a phenomenal idea.

Not much different than a donor advised fund, but would maybe make it more mainstream.

I don't see the downside to it existing, personally (aside from the "Charity is immoral Randian crowd).
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chasesfish

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Re: Would you use a tax-advantaged charitable account?
« Reply #6 on: January 22, 2017, 09:41:47 PM »
This is a phenomenal idea.

Not much different than a donor advised fund, but would maybe make it more mainstream.

I don't see the downside to it existing, personally (aside from the "Charity is immoral Randian crowd).

I'd debate that "Randian" comment, I worked for a die-hard follower (issued Atlas Shrugged to all employees).  Absolute proponent of charitable giving, as living in a prosperous community is in our rational self interest.  He also argued that it's better to give voluntarily to address social problems than have the government/voters seize wealth at gunpoint.

arebelspy

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Re: Would you use a tax-advantaged charitable account?
« Reply #7 on: January 22, 2017, 09:51:23 PM »
Not interested in debating it.

Plenty of people who call themselves Randians consider charity immoral. Some don't. Okay. 
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chasesfish

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Re: Would you use a tax-advantaged charitable account?
« Reply #8 on: January 22, 2017, 10:13:32 PM »
The "charity is immoral" crowd would also be characterized as jerks and misguided...Rand argued against the idea of charity as a "duty".  I'm one of the rare fans on here and have to stick up for that

That aside, keep up the good work - finally caught your interview on Mad Fientist.  Instanbul childbirth, incredible

ohsnap

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Re: Would you use a tax-advantaged charitable account?
« Reply #9 on: January 23, 2017, 07:42:46 AM »
... Then individuals and families could make well thought decisions about their philanthropy.  ...


Don't most people who donate to charity already make "well thought out decisions" about it?  I'm not sure how this would be different than our current system other than to separate the the benefit of the tax deduction for the donor from the benefit of the actual receipt of the donation by the donee.  As an example, my husband and I help support an after-school program.  We donated in 2016 and will take the tax deduction in 2016.  How would your proposed fund change our behavior or decision-making process relative to that?  It seems like it would just add a layer of expense for administration, and might even have an adverse affect on charities as donors get the tax benefit without forwarding the money to actual beneficiaries.

The IRS has different rules for deductability of donations to certain charitable foundations probably for those very reasons.  https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions (scroll down to the limitations section)


historienne

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Re: Would you use a tax-advantaged charitable account?
« Reply #10 on: January 23, 2017, 01:49:04 PM »

Don't most people who donate to charity already make "well thought out decisions" about it?  I'm not sure how this would be different than our current system other than to separate the the benefit of the tax deduction for the donor from the benefit of the actual receipt of the donation by the donee.  As an example, my husband and I help support an after-school program.  We donated in 2016 and will take the tax deduction in 2016.  How would your proposed fund change our behavior or decision-making process relative to that?  It seems like it would just add a layer of expense for administration, and might even have an adverse affect on charities as donors get the tax benefit without forwarding the money to actual beneficiaries.

The IRS has different rules for deductability of donations to certain charitable foundations probably for those very reasons.  https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions (scroll down to the limitations section)



As I understand it, the difference would be for people who take the standard deduction and therefore don't specifically deduct charitable deductions.

The biggest issue would be paying for it.  This is a tax cut.  Better than most, because the people who take the standard deduction generally have lower incomes and less wealth, so they would benefit more from a tax cut than many alternative proposals.  By the same token, however, it won't provide significant savings to most of those people, because most people who are taking the standard deduction don't have a particularly high marginal tax rate anyway.

Regardless, it still needs to be paid for somehow.  I'd be happy to trade it for a limit on the mortgage interest deduction, for example.  If we are going down that road, however, there are MANY uses of federal funds that I think would be better, including a plain tax cut on households earning less than the median income.  There are significant administrative costs associated with running FSA-type accounts, which makes them an inefficient way to channel tax cuts and/or subsidies.  Also, a lot of "charitable" spending is not particularly in the public interest anyway (I'm thinking of things like donations to universities that already have multibillion dollar endowments).  For that reason, I'd generally prefer to narrow the scope of the charitable deduction rather than expand it.

CheapScholar

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Re: Would you use a tax-advantaged charitable account?
« Reply #11 on: January 23, 2017, 04:16:27 PM »
OP here.  Couple things.  My logic is that not ALL high earning households itemize and are given any tax break on charitable giving.  My family has an income of 145K but we don't itemize.  We live in a modest home and our finances are quite simple. 

As for the question: don't people already make informed decisions about charity?  Honestly, I'm not so sure.  For a lot of people it's $10 here, $25 there and sometimes $100 for something they are passionate about.  If a family could sock away 1K or 2K every year (more upper middle class families, I admit) then I could envision families making serious decisions about what to support and why.

Finally, I do admit this is a tax cut.  No doubt about it, which is why I haven't thought too hard about the policy question of what the annual max could be.  This also brings into the discussion, what charities should be included.  I tend to think any non-profit complying with the law.  I work in fundraising for one of those universities with a multi billion dollar endowment.  I admit I'm biased, but if an individual wants to create a scholarship at my university for a disadvantaged person, that's still a really cool thing for society.  Also, our big endowment university does conduct research in all kinds of fields (including medicine) that ultimately benefits everyone. 

As for the administrative costs with this.  I admit it's an issue.  But the health savings accounts are still a good value.  I don't see why the same idea couldn't apply to philanthropy.

This might allow someone to save their philanthropic dollars until they are ready to select the right charity.  And it would funnel resources into the stock market.

Undecided

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Re: Would you use a tax-advantaged charitable account?
« Reply #12 on: January 23, 2017, 04:55:16 PM »
OP here.  Couple things.  My logic is that not ALL high earning households itemize and are given any tax break on charitable giving.  My family has an income of 145K but we don't itemize.  We live in a modest home and our finances are quite simple. 

As for the question: don't people already make informed decisions about charity?  Honestly, I'm not so sure.  For a lot of people it's $10 here, $25 there and sometimes $100 for something they are passionate about.  If a family could sock away 1K or 2K every year (more upper middle class families, I admit) then I could envision families making serious decisions about what to support and why.

Finally, I do admit this is a tax cut.  No doubt about it, which is why I haven't thought too hard about the policy question of what the annual max could be.  This also brings into the discussion, what charities should be included.  I tend to think any non-profit complying with the law.  I work in fundraising for one of those universities with a multi billion dollar endowment.  I admit I'm biased, but if an individual wants to create a scholarship at my university for a disadvantaged person, that's still a really cool thing for society.  Also, our big endowment university does conduct research in all kinds of fields (including medicine) that ultimately benefits everyone. 

As for the administrative costs with this.  I admit it's an issue.  But the health savings accounts are still a good value.  I don't see why the same idea couldn't apply to philanthropy.

This might allow someone to save their philanthropic dollars until they are ready to select the right charity.  And it would funnel resources into the stock market.

Why not just propose to make charitable contributions above-the-line deductions? Seems easier. And then maybe taxpayers affected by the Pease limitations back it, too.

arebelspy

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Re: Would you use a tax-advantaged charitable account?
« Reply #13 on: January 23, 2017, 05:04:06 PM »
Why not just propose to make charitable contributions above-the-line deductions? Seems easier. And then maybe taxpayers affected by the Pease limitations back it, too.

That was the conclusion I came to also; rather than extra paperwork of an extra account, let's just make it so every charitable contribution is deductible, separate from the standard deduction.

I'd support that... it's basically more money to charity and/or people giving to charity who take the standard deduction get a small tax cut (why shouldn't they, if they're giving to charity with that money?).

I like it.
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bugbaby

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Re: Would you use a tax-advantaged charitable account?
« Reply #14 on: January 23, 2017, 05:27:02 PM »
I used to work in the Planned Giving department of a major university... It's a fairly popular mode for very high income individuals to set up charitable gift annuities and charitable remainder trusts. 

You get tax deduction for the full amount and receive a % higher than bonds and CD...win-win.

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