Sunday, May 30, 2004

If you are considering giving to charities, consider giving the tax deduction to them too. (In the United States at least, donations to charities are considered “tax-deductible” and you do not have to pay taxes on that amount.) If you donate an item or cash worth x, and your tax rate is r (30% would mean r=0.3), then you’re going to get x*r back in your tax refund. Give that to the charity (in cash). You’ll get x*r2 back in your tax refund. Give that to the charity too. You’ll get x*r3 back. Give that to the charity too. Rinse and repeat.

What the charity will end up getting is x + x*r + x*r2 + x*r3 + .... Written another way, that's x * (1 + r + r2 + r3 + ...). This can be rewritten as x * (1 / (1 - r)).

So when you’re giving an item worth x to the charity, if you decide to give all the tax credits to them, they will end up with something worth x / (1 - r). Let’s say you’re donating an item worth $100 and your marginal tax rate is 33% (federal + California can easily be this high). You can give them $100/(1-0.333) = $150 if you go through the itemized tax deductions. So give them the original item plus the $50. That’s a big bonus for them (especially since it’s cash), and all it costs you is the time and hassle of keeping track of the receipts for tax purposes. If you had kept the tax credit, you would have $33, but if you give it to them, it’s worth $50.

1 comment:

Anonymous wrote at Monday, October 11, 2004 at 5:55:00 PM PDT

It's worth pointing out that you can do this without donating more than you meant to give originally. Use the same approach to figure out what seed price you need to give to achieve your target total donation.