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Tax-efficient donations

From EA Wiki

Which charities you can give to tax-efficiently in your country

A user friendly interactive tool showing how to donate to GiveWell charities tax-efficiently can be found on the EA Hub.

Country-specific

US

IRAs

Ben Kuhn:

"The IRS suggests that you can donate up to $100k/year directly from an IRA to charity once you're above age 70.5 (see http://www.irs.gov/Retiremen…/Charitable-Donations-from-IRAs) and have it count towards mandatory disbursements. This suggests that a Traditional IRA is probably better than Roth, since you can get most of the benefit of tax-free withdrawals via the donation. Is that accurate?"

Reply from Eitan Fischer:

"Yes, this is a nice point, and relevant. Though 70.5 is so far away, and these kinds of laws/regs change rather frequently. So much so that I would think the other reasons to choose Roth or Trad will likely dominate. After all, you're probably saving like, what, a total of $25k or so per year (assuming similar rates - a big assumption), starting ~45 years from now, which is around like $6k today, right? Not trivial, but adjusting for likelihood of repeal I would think it's not that big a consideration.

The question is a rather interesting one though generally (Roth v. Trad) and I would love to see more discussion on it from an EA perspective. The big ones on each side: tax savings today vs. withdrawability after 5 years."

Donating via others

If you donated via someone else, your transfer to them isn't subject to tax unless over 14k: https://www.facebook.com/groups/effective.altruists/796179020438457/?notif_t=group_comment_reply

UK

Gift Aid

Gift Aid allows charities to reclaim a basic rate of 20% on any donation you make. So for each pound you donate, the charity will receive an additional 25p¹. However there are some restrictions.

The amount of tax the charity can claim back cannot be more than the amount of tax that you paid in the tax year in which the donation is made. This includes Income Tax, Capital Gains Tax and tax from pensions, interest on savings, investments and rental income.

This only applies to certain charities. They must be based in the UK, the EU, Iceland or Norway. And they must be registered by HMRC.

You will need to fill in a Gift Aid Declaration form provided by the charity before they can claim back Gift Aid on a donation.

¹ Why 25p? Well, if you get £100 in gross pay, and you're taxed at 20%, then you receive £80 after tax. Then if you donate that to charity, the tax is deducted and the charity receives £100. That's £20 more than your £80 donation, i.e. your donations are increased by 25%.

Gift Aid: Further considerations

Gift Aid can be claimed back on gifts made jointly if you tell the charity how much each of you gives and you must both made a Gift Aid declaration.

You should inform the HMRC of any Gift Aid donations if you receive age-related Personal Allowance, Married Couple’s Allowance or tax credits as this can affect the amount you receive. When they work out how much Allowance or tax credit to award they will take the amount donated plus the basic rate tax from the total income and use that figure to determine the amount to give rather than just your income.

Higher-rate tax payers

With Gift Aid the charity can reclaim only at the basic rate of income tax. If you pay tax at a higher rate that the basic rate then you can claim back the difference on your Self-Assessment Tax Return.

The difference in the higher rate compared to the basic rate of tax is claimed on the total value of the donation. E.g. if you pay 45% tax rate and donate £1000 to charity, the value of the donation due to the basic rate of tax (20%) is £1250 and you can claim back the difference (25%) of the total value: 0.25 x £1250 = £312.5.

This precisely works out to be equivalent to what would happen if your employer paid the charity directly, paying no income tax, instead of paying you and you giving money to the charity. Let's illustrate:

Scenario 1: employer pays £x to charity directly.

Scenario 2: employer pays £x to you. You receive 55% of £x after tax. You pay 80% of £x to charity (because of the way Gift Aid works, this results in £x arriving at the charity, as in Scenario 1). You're now 25% of £x out of pocket, so that's precisely what you claim back on your SA tax return.

Multi-year giving

If you donate to charity in a year when you're paying a higher rate of tax, and in the following year you move down a tax bracket, you can retroactively reallocate your donations from the lower-taxed year back into the higher-taxed year. To quote from the HMRC website:

"You can ask HM Revenue and Customs to treat Gift Aid payments, made between 6 April 2015 and the date you send back your Return (assuming you send it back by the appropriate filing deadline), as if they were made in the year to 5 April 2015. You might want to do this if you know you won't be paying higher rate tax this year but you know you did (or will do) in the year to 5 April 2015. (You can't do this on an amended Return)."

Complex donation options

Donating via others

If you donate via others, you should be careful to follow tax law. However in the US your transfer to them isn't subject to tax unless over 14k: https://www.facebook.com/groups/effective.altruists/796179020438457/?notif_t=group_comment_reply

UK

Donating via someone else to make use of their gift aid allowance is tax evasion, since gift aid is only intended to make your donation tax free, not donations you're making on someone elses's behalf. https://www.facebook.com/groups/effective.altruists/permalink/948386481884376/