Part of the reason I posted here was to get feedback exactly like this, from people more knowledgeable than I am. So I really appreciate both the feedback and your ideas as to how it can still work.
Given the complexity you describe, I am tempted to suggest a two-pronged approach:
Short-term:
Your donation is NOT initially tax-deductible, but (in return for that), if/when you decide to make part or all of a donation permanent, that would then be tax-deductible. I’m not sure, but this would seem to be fair according to the way the tax-laws are supposed to work.
Long-term:
If this becomes a common phenomenon, big enough to warrant the effort, it would be interesting to re-negotiate the way it works with the tax-authorities, so that at donation would initially be tax-deductible but the amount that would be recovered would be only the non-tax-deductible part (e.g. the $80 in the example you described) - and then (TBD) maybe the remaining $20 must be paid back to the tax-authorities, or maybe not.
I really appreciate your perspective of looking at this from the tax-authorities point-of-view, which indeed would probably have to be very cynical. And let’s face it, in most cases, I agree with them. It already bothers me that very rich people can give millions to a very rich church rather than pay taxes that would be used to help provide better services for the poor—even when nobody breaks any laws.
But that’s my top-of-mind reaction—I will give this some more thought!
Short term plan should work in the US, as long as the donor doesn’t have more than $250K in revocable donations (which the tax system will treat as loans) to any organization. The downside is that there is no tax benefit until the year in which the donation becomes irrevocable, and donors tend to value the immediate deduction. E.g., this is one of the main motivations for donor advised funds in which the donor gets the deduction now but decides the ultimate recipient of the funds later.
Long term plan could be tough—Congress is relatively unlikely to accept any plan unless it leaves the government coffers in as good a shape after the gift is reversed than they would have been in had the gift never occurred. Trying to unwind a transaction that happened, say twenty years ago is just painful.
One possible way to ameliorate that would be to impose a limit of ~five years on any refund, and to require taxpayers to keep full records for the tax year of deduction until the refund window closed. I guess it would then be possible to require the taxpayer to file an amended return for the tax year of donation without the deduction, then pay any increase in tax plus interest.
Another option would be a rule like we use for most premature withdrawals from certain tax-advantaged retirement & medical accounts: you have to declare the withdrawal as income in the year of withdrawal and pay a 10 percent penalty on top of that. I’m not sure what the theoretical justification for that penalty is, but it should at least dampen enthusiasm for manipulating the tax system with income-timing games.
Some really good ideas there. The last paragraph is particularly interesting. Because, indeed, my idea is that this should be absolutely a last-resort scenario, and so, while I too would struggle to find a justification for this, it is the kind of scheme that would fit well.
Your second paragraph is the key challenge. All i can say is that I haven’t investigated this in depth, especially since I’m not only not a tax-expert, but also not US-based, and this point would be different in every country. But I believe that it’s not an impossibly difficult calculation to figure out a way to ensure this, the challenge might be just in convincing anyone to add even more complexity to the tax-laws.
Really appreciate your thoughtful input and ideas!
One note of encouragement: for EA at present, the bulk of donations come from a few countries, so you could get the bulk of expected impact by making the scheme work in only those few countries.
Thank you Jason for this really helpful comment!
Part of the reason I posted here was to get feedback exactly like this, from people more knowledgeable than I am. So I really appreciate both the feedback and your ideas as to how it can still work.
Given the complexity you describe, I am tempted to suggest a two-pronged approach:
Short-term:
Your donation is NOT initially tax-deductible, but (in return for that), if/when you decide to make part or all of a donation permanent, that would then be tax-deductible. I’m not sure, but this would seem to be fair according to the way the tax-laws are supposed to work.
Long-term:
If this becomes a common phenomenon, big enough to warrant the effort, it would be interesting to re-negotiate the way it works with the tax-authorities, so that at donation would initially be tax-deductible but the amount that would be recovered would be only the non-tax-deductible part (e.g. the $80 in the example you described) - and then (TBD) maybe the remaining $20 must be paid back to the tax-authorities, or maybe not.
I really appreciate your perspective of looking at this from the tax-authorities point-of-view, which indeed would probably have to be very cynical. And let’s face it, in most cases, I agree with them. It already bothers me that very rich people can give millions to a very rich church rather than pay taxes that would be used to help provide better services for the poor—even when nobody breaks any laws.
But that’s my top-of-mind reaction—I will give this some more thought!
Cheers!
Short term plan should work in the US, as long as the donor doesn’t have more than $250K in revocable donations (which the tax system will treat as loans) to any organization. The downside is that there is no tax benefit until the year in which the donation becomes irrevocable, and donors tend to value the immediate deduction. E.g., this is one of the main motivations for donor advised funds in which the donor gets the deduction now but decides the ultimate recipient of the funds later.
Long term plan could be tough—Congress is relatively unlikely to accept any plan unless it leaves the government coffers in as good a shape after the gift is reversed than they would have been in had the gift never occurred. Trying to unwind a transaction that happened, say twenty years ago is just painful.
One possible way to ameliorate that would be to impose a limit of ~five years on any refund, and to require taxpayers to keep full records for the tax year of deduction until the refund window closed. I guess it would then be possible to require the taxpayer to file an amended return for the tax year of donation without the deduction, then pay any increase in tax plus interest.
Another option would be a rule like we use for most premature withdrawals from certain tax-advantaged retirement & medical accounts: you have to declare the withdrawal as income in the year of withdrawal and pay a 10 percent penalty on top of that. I’m not sure what the theoretical justification for that penalty is, but it should at least dampen enthusiasm for manipulating the tax system with income-timing games.
Thanks Jason,
Some really good ideas there. The last paragraph is particularly interesting. Because, indeed, my idea is that this should be absolutely a last-resort scenario, and so, while I too would struggle to find a justification for this, it is the kind of scheme that would fit well.
Your second paragraph is the key challenge. All i can say is that I haven’t investigated this in depth, especially since I’m not only not a tax-expert, but also not US-based, and this point would be different in every country. But I believe that it’s not an impossibly difficult calculation to figure out a way to ensure this, the challenge might be just in convincing anyone to add even more complexity to the tax-laws.
Really appreciate your thoughtful input and ideas!
Cheers
Denis
One note of encouragement: for EA at present, the bulk of donations come from a few countries, so you could get the bulk of expected impact by making the scheme work in only those few countries.