Do Charitable Write-Offs Pay Off?

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We’ve just passed through tax time again. (Unless, like me, you live in one of several states ravaged by recent extreme weather events brought on by climate change. In that case, you can wait until October.) It’s also that moment when the War Resisters League—slogan: “If you work for peace, stop paying for war”—publishes its invaluable annual “Where Your Income Tax Money Really Goes” pie chart and publicizes a series of Tax Day events nationwide.

For many of the rest of us, it’s time to pat ourselves on the back for the charitable donations we made to tax-deductible organizations in 2022. Time to pat ourselves on the back for being clever and generous enough to “do well by doing good,” right? Time, perhaps, to wonder why, even when we give to organizations seeking radical change, the IRS still rewards us with a tax deduction. Do the feds really support organized opposition to, for example, the military-industrial complex? Or is there more to the story of what my students sometimes refer to as the “nonprofit-industrial complex”?

What’s That Tax Deduction Really Worth?

For many decades, people who give away money have been schooled to seek a tax deduction in return. We’re encouraged to be suspicious of organizations that don’t qualify under section 501(c)(3) of the US Tax Code, which offers a bonus for our generosity. We’re told that the federal government will bless any organization that’s really doing something useful with the magic wand of that coveted tax-deductible status.

Can’t charitable donations save us thousands of tax dollars? Doesn’t that make insisting on such a tax deduction the grown-up thing to do?

Not, as it turns out, for most people. This belief that charitable write-offs also pay off is based on a misunderstanding about how such tax deductions work. Suppose you give a qualifying charity $100. That will reduce your tax bill by the same amount, right? Alas, no. That $100-dollar gift will reduce the amount of your income that you pay taxes on by half the amount of your gift, or $50. This means that if you, like most working folks, pay federal taxes at an effective rate of less than 15 percent, the amount you save on taxes by giving $100 is less than 15 percent of $50, or a whopping $7.50—the price of a couple of fancy coffee drinks.

But giving to get a tax deduction is even less financially advantageous than that. Suppose you’re part of a married couple that earned $120,000 in 2022. Lucky you. If you were taxed for every penny of that amount, your federal income tax bill would be $17,634, an effective tax rate of 14.7 percent. (Look here to see how it works.)


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