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 U.S. 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?
This belief that charitable write-offs also pay off is based on a misunderstanding about how such tax deductions work.
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%, the amount you save on taxes by giving $100 is less than 15% 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%. (
Look here to see how it works.)
What if you decide to tithe, donating 10% of that $120,000, or $12,000, to qualifying charities? Such giving would reduce your taxable income by $6,000, bringing it down to $114,000. Your federal income tax bill would then come down to $16,314, saving you about $1,320. Not bad, eh?
But here's the kicker: Suppose instead that you decide not to "itemize"—that is, list all your contributions (and other expenditures like that great middle-class
welfare plan, the mortgage interest tax deduction)? Instead, you opt for the "standard deduction." For a married couple filing together, that will reduce your taxable income by $25,900, bringing that same tax bill to a mere $11,396, saving you about $5,700 in taxes without your giving away a penny. To get the same tax write-off by making contributions, you'd have to donate twice the standard deduction, or $51,800.
So am I suggesting that we shouldn't give money to non-profits, because we often don't really benefit from the tax deduction?
Absolutely not. I'm saying that when we donate, we shouldn't do it because of the tax deduction. We should do it, if we can, because it supports activities crucial to our own and the long-term survival and even flourishing of so many other people. This is true, whether you're helping a relative pay the rent this month or contributing to a candidate for the Wisconsin supreme court. Neither of those gifts will garner you a penny in tax deductions, but one will keep someone you love off the street and the other would have helped ensure that women in Wisconsin could still get an abortion when they needed one.
Who loses out when we refuse to give without a tax deduction? To begin with, we do, because we've placed an artificial limit on the kinds of campaigns, organizations, and people we allow ourselves to donate to. We've automatically excluded, for instance, gifts to political parties and candidates. No organization offering tax deductions can support or oppose any candidate for elected office. Of course, elected officials aren't the only people in a position to affect our lives, but four years under Donald Trump and a couple under Joe Biden should have reminded us that they can do a whole lot of harm, or
substantial good.
Making Sense of the Foundation-Non-Profit Complex
The current system of tax deductions creates other losers as well. The halo that surrounds 501(c)(3) status also constrains recipient non-profit organizations. Those that agree to the IRS rules are making a not-always advantageous deal with the devil. That tax-deductible status comes with some hefty limits:
- No electioneering (campaigning for or against candidates)
- No activities outside the "charitable and educational purpose" described in the organization's original application for such status
- Organizations may not be created for the purpose of violating laws, meaning that advocating for civil disobedience, for example, or tax resistance can't be part of an organization's official purpose.
Failure to comply with the rules can get an organization's tax-exempt status yanked. One result: organizations begin to censor themselves, sometimes restricting their activities even more than the law requires. For example, while 501(c)(3)s aren't allowed to get involved in election campaigns for specific candidates, depending on their total annual income, they are allowed to use as much as 20% of their spending each year to influence legislation or government policies.
[O]rganizations begin to censor themselves, sometimes restricting their activities even more than the law requires.
That means they can work directly for or against ballot initiatives and spend money to lobby government officials. They can, for example, employ paid lobbyists or rent buses to bring people to a state capitol or Congress to talk to their representatives about a particular issue. Many smaller non-profits may not even know this and so may limit their scope of action even more severely than the law requires for fear of losing that precious status.
The third restriction (no illegal purposes) has ramifications for organizations that may want to fund or be involved with actions that are nonviolent but illegal, like certain kinds of civil disobedience. In 1975, for instance, the IRS
denied 501(c)(3) status to an antiwar organization whose stated charitable purpose was training people to participate in nonviolent civil disobedience. Does that mean that no 501(c)(3) outfit can engage in civil disobedience? No, but it does mean that your entire stated charitable purpose cannot be law-breaking. Fear of losing their status, whether well-founded or not, keeps many organizations from even considering participation in entire realms of political action.
Given these restrictions, why would organizations seeking radical change to existing racial, gender, or economic structures want to go the 501(c)(3) route? What makes that status so valuable for a non-profit organization? We've already seen that individual donors shy away from giving when they don't get a tax deduction. But for many organizations there's an even more important source of funds that also requires the 501(c)(3) tag: foundation grants. Although individuals
give far more money overall than foundations, many organizations depend on large chunks of money from foundations, which in most cases will only make grants to 501(c)(3) groups.
But accepting foundation funding is another Faustian bargain for several reasons:
- Foundation funding can deform your program: It can entice you to change your focus and your activities to attract grant money. You're no longer choosing your own priorities. Instead, you find yourself tailoring what you do to what foundations want to support.
Say yours is a racial-justice organization working for serious police reform. Funding for your area of work is scarce, but a whole tranche of funding for after-school youth programs suddenly becomes available. Now, there may even be a place for such programs addressing young people in your overall political strategy. But if you need the money to keep the doors open, you may be tempted to refocus large parts of your program, not because you think after-school youth activities are the best vehicle for police reform, but because that's where the money is.
- Foundations can be fickle: They are easily distracted by the new and shiny. One moment, they may be all about "sustainable communities," which might be a perfect fit for your organization's efforts to address the problems of renters in your city. So you spend three years building the coalitions and doing the public contact work necessary to put a rent-stabilization ordinance on the ballot. At that very moment, however, the money dries up, because funders are now focusing on public transit instead. Just when you most need the support to help win the next election, your benefactors have wandered off in pursuit of something different.
- Foundations can rearrange an entire non-profit "ecosystem:" They may, for example, look at organizations in various states working on racial justice in public education and decide that such a movement needs a national "collaboration" (a foundational buzzword). So a coordinating council is created and funded, requiring that individual organizations participate as a condition for receiving grant money. That means they'll have to divert staff time for planning for national meetings, Zoom calls, and conferences. Such a coalition could, of course, supercharge the work of individual organizations, but it might just as easily distract them from crucial local work while involving them in controversies they'd rather avoid.
- Foundations have no incentive to support fundamental economic change: Where do foundations come from? The majority, even in the liberal and progressive world, are private, often funded by a single family (think "Rockefeller") or company (think "Ford" or "Kellogg"). Creating such philanthropic vehicles provides real tax advantages to such families and companies. It also gives them a very respectable way of influencing public policy. Ultimately, these foundations are not going to support serious challenges to the capitalist system, because that system guarantees the continued wealth of their founders.
Foundations and "Movement Capture"
I teach at a college, and, over the years, many of my justice-minded students have expressed a desire to change the world by founding their own non-profit organizations. In their minds and based on the models they see in their worthy
community-engaged learning classes, non-profits are the sine qua non of social change and social movements. For most of them, working for social justice means working for a non-profit.
It wasn't always this way. Before the 1954 U.S. tax code created the 501(c)(3) designation, charities existed, but mostly to provide direct aid to people in need. They certainly weren't the main political vehicles for social change. In fact, many people organizing to improve their lives were far more likely to turn to unions, not only to improve wages and working conditions, but to address other issues in their lives like housing. It's probably no accident that the rise of the non-profit sector in the second half of the twentieth century coincided with the reduced power of unions.
In fact, many people organizing to improve their lives were far more likely to turn to unions, not only to improve wages and working conditions, but to address other issues in their lives like housing. It's probably no accident that the rise of the non-profit sector in the second half of the twentieth century coincided with the reduced power of unions.
It was during the civil rights movement of the 1950s and 1960s that modern non-profits and foundations first played a significant role in attempts to bring about structural change in this country, even while also ensuring that such change, in the end, would be limited in nature. The giant among those philanthropic organizations was then the Ford Foundation, the largest collection of charitable wealth the world had ever seen.
A bit late to the civil rights fight, Ford turned its attention in that direction toward the end of the 1960s, after the passage of the Civil Rights and Voting Rights Acts. Under the leadership of McGeorge Bundy, a Cold War liberal and Vietnam War architect, Ford began to
make huge contributions in the field of civil rights, mainly to the venerable National Urban League, but also to the NAACP. At the same time, it sought to reduce more militant activities, refusing, for example, to fund Martin Luther King's planned Poor People's March on Washington, scheduled for 1968. At the time when the Black Power movement was growing, Ford used its inaugural funding of Black organizations to moderate the influence of more radical voices.
University of Washington scholar Megan Ming Francis has labeled such attempts to use foundation money to control and channel a powerful social movement as "movement capture." In a 2019
paper, she describes an early example of this process. During the 1920s and 1930s, she writes, funders, including the white-run Garland Foundation, used "their financial leverage to redirect the NAACP's agenda away from the issue of racial violence to a focus on education at a critical juncture in the civil rights movement." A decades-long fight for a federal anti-lynching law never succeeded.
Who knows what might have happened had the most powerful civil rights organization of the time kept its focus on lynching and the institutionalized state torture of Black people in the early twentieth century? Maybe police would no longer continue to
routinely kill people of color with such impunity in this century.
An
extract from the Ford Foundation's 1967 annual report indicates that the tradition of squelching popular uprisings and redirecting the focus of activists lived on at Ford:
"Staff attention has been turned to the more militant civil rights organizations, specifically the Congress Of Racial Equality (CORE) and the Southern Christian Leadership Conference (SCLC). Our interest in both is in seeing whether we may be of help to them in
fashioning rational, goal-oriented programs of constructive action." [Emphasis added.]
In other words, use Ford money to get the militants to pivot to activities their "betters" then considered "constructive action."
What's a Donor to Do?
The view of funders and non-profits I've offered here doesn't fit either the right-wing understanding of charity as an alternative to government action (former President George H.W. Bush's "thousand points of light") or the liberal belief in the power of foundation-funded organizations to change the world. Unfortunately, I have no prescription for how or where to give your money away this tax season, or indeed during the rest of the year. I can only suggest that you do give. And that whatever any of us give, whether it be money, time, or attention, we do it expecting the only return that really matters: taking part in the larger movements for justice and mercy in all their forms.
