In the US, it is quite common to donate large sums of money. This is because there are significant tax benefits in doing so, effectively meaning that in some cases you can somewhat choose to either pay taxes or to donate to an organization of your choice.
I’ve seen this misunderstanding before by non-Americans, which seems weird because most places have similar setups. In the US, charity is tax deductible, but not a tax credit—so at any income level, you will personally have more money not donating than donating. And given that typical maximum marginal tax levels between state and federal taxes are under 50%, it means you are losing $0.50 for every dollar you give away, which is far less than needing to pay he full amount, but not anything like “pick whether to give the dollar to the government or to a charity.”
The near-exception is donation of significantly appreciated assets. I think you virtually always still lose money, but it can get close.
You can donate up to 30% of your annual income as appreciated assets valued at market price. If I have that option in a relatively high-tax state like CA, then the decision can be between me keeping $1 or the charity getting >$6.
Suppose I pay $1 for an asset, it goes up to $100, then I donate it. I’d avoid paying 20% (federal) + 12.3% (state) + 3.8% (obamacare) = $36 in taxes on the $99 of capital gains. On top of that, I’d get to take a tax deduction of $100 which will save me about 37% (federal)+ 12.3% = $49 on my tax bill. So overall I’m saving $85 in taxes for every $100 donated.
(Not sure if those calculations are wrong or if I’m missing something.)
I think that checks out, though it depends on being in a high-tax state, when your marginal income tax is in the top bracket − 37% is for income above a half million dollars. You need enough income to actually get the large tax deduction in the year you make the donation—startup founders and inheritors of appreciated assets could often get a tax credit for more than their normal income, if they donate it all at once. For lower income people, it also takes a large donation to make it better to itemize than to take the standard deduction. And this only occurs for relatively wealthy folks with high incomes. (Which probably describes you at this point, so congrats!)
But overall, I’d still say it’s not “quite common.”
I’ve seen this misunderstanding before by non-Americans, which seems weird because most places have similar setups. In the US, charity is tax deductible, but not a tax credit—so at any income level, you will personally have more money not donating than donating. And given that typical maximum marginal tax levels between state and federal taxes are under 50%, it means you are losing $0.50 for every dollar you give away, which is far less than needing to pay he full amount, but not anything like “pick whether to give the dollar to the government or to a charity.”
The near-exception is donation of significantly appreciated assets. I think you virtually always still lose money, but it can get close.
You can donate up to 30% of your annual income as appreciated assets valued at market price. If I have that option in a relatively high-tax state like CA, then the decision can be between me keeping $1 or the charity getting >$6.
Suppose I pay $1 for an asset, it goes up to $100, then I donate it. I’d avoid paying 20% (federal) + 12.3% (state) + 3.8% (obamacare) = $36 in taxes on the $99 of capital gains. On top of that, I’d get to take a tax deduction of $100 which will save me about 37% (federal)+ 12.3% = $49 on my tax bill. So overall I’m saving $85 in taxes for every $100 donated.
(Not sure if those calculations are wrong or if I’m missing something.)
I think that checks out, though it depends on being in a high-tax state, when your marginal income tax is in the top bracket − 37% is for income above a half million dollars. You need enough income to actually get the large tax deduction in the year you make the donation—startup founders and inheritors of appreciated assets could often get a tax credit for more than their normal income, if they donate it all at once. For lower income people, it also takes a large donation to make it better to itemize than to take the standard deduction. And this only occurs for relatively wealthy folks with high incomes. (Which probably describes you at this point, so congrats!)
But overall, I’d still say it’s not “quite common.”