Most Donors Pay Too Much - A Non-Traditional Look At How Donors Can Pay Less and Achieve More in 2021
Do you donate to charity? If so, there is a decent chance that you are paying more than you should to make an impact. We know this because for years we have watched donors make contributions, yet not qualify for charitable tax deductions simply because they did not know that there is a better way to support their favorite charity. We have also helped donors maximize their gifts by not paying more than is necessary.
As an organization, we typically focus our content on helping donors optimize their impact by being more strategic about where they give, since this is where the greatest opportunity is to improve charitable impact. This article focuses on how donors can improve how they give with the intent that they will be able to reduce unnecessary taxes and increase their donations without increasing the cost of giving. We encourage you to explore our other programs if you are interested in learning how to measure the impact of the charities you support.
Which donors pay too much?
The Tax Foundation estimates that only 13.7% of taxpayers itemized their taxes in 2019. Because you can only claim a charitable tax deduction if you itemize, this means that 85%+ of taxpayers were not even eligible to claim a charitable tax deduction in 2019. To be fair, not all taxpayers donate to charity so the percentage of donors that are missing out on this deduction is likely far lower. One poll of 630 US donors found that only 44% of donors that gave more than $2,500 per year, and just 31% of donors giving $500-$2,499 actually itemized. From our perspective, donors that give to charity and also claim a standard deduction are the first group of donors paying too much.
The second group of donors paying more than they should are any donors giving from income that is subject to FICA taxes. This is a much larger group, but the potential benefits are smaller than those not able to claim a charitable tax deduction.
The Four Letter Tax
FICA. The Federal Insurance Contributions Act (FICA) is a law that mandates a payroll tax on both employees and employers to fund Social Security and Medicare programs. For 2021 the FICA tax rate for both employers and employees is 7.65% (6.2% for Social Security and 1.45% for Medicare), this is consistent with 2020. One change that was made for 2021 was an increase to the maximum earning subject to the Social Security portion of this tax (the Medicare portion does not have an earnings threshold); this increased from $137,700 in 2020 to $142,800 for 2021. Combining the employee and employer portion of this tax brings the total to 12.4% if you are an employee making less than $142,800. There is also an additional Medicare tax paid by employees making more than $200,000.
These taxes are the second greatest source of tax revenue of the Federal Government; second only to income taxes. Taxpayers often hear about strategies to reduce income taxes (business deductions, retirement account contributions, flex spending plans, etc.) but we have found that strategies to reduce FICA taxes are few and far between.
When we started to design our workplace giving program so that employees and their employers could have a better way to raise money for charity - we studied the tax code closely for opportunities to minimize the cost of donations using traditional and non-traditional tax mitigation methods. As a result we were ultimately able to design a program that reduces both FICA tax liability and income tax liability, something truly unique as most programs only reduce a donor’s adjusted gross income (AGI) and only if the donor itemizes their taxes.
How Much Are Donors Overpaying?
We find that it is common for donations to cost 37-39% more than is necessary in total. This represents a roughly 25-30% savings to individuals, with the remaining savings going to employers via FICA tax savings.
Realizing this savings allows donors to give significantly more without creating an additional burden on their budget. Imagine the impact that an additional 30%+ of donations would have on the charities benefiting from our donations.
What Is The Solution?
Effective Give has designed a Workplace Giving program that helps reduce the cost of donations with benefits to both employees and employers. The program is specifically designed to reduce both FICA tax liability and income tax liability for those that would not normally be able to claim a charitable tax deduction. Our team handles all of the administrative aspects of the program and there is no additional expense to the sponsoring organization.
If you are an employer or employee interested in learning about how you can optimize your donations through Workplace Giving we encourage you to reach out to our team to learn more by emailing us at firstname.lastname@example.org
Curious about your savings? Use our calculator to estimate how you (and your employer) could benefit from Effective Give’s Workplace Giving Program and reduce the cost charitable giving.
Daily Good is a program where volunteers sign up to vote on the level of impact that various burdens have on our society. With just 30 seconds per day – volunteers contribute by answering three questions about a burden that is the focus of one or more non-profit profit programs. The volunteers' answers are then added to a database to create a score called a utility weight. We use utility weights to measure how much a burden is perceived to negatively impact society. Once enough data is collected to have a statistically significant result, we publish the utility weight for each burden. Using our impact calculator donors (and charities) can then use these utilities to help them understand how much of an impact is made each time a particular burden is averted or resolved by a charity’s program. By measuring the utility of burdens we can normalize the manner in which we compare two burdens, thereby giving us the ability to compare the impact of two (or more) charities even if the programs are focused on producing very different outcomes.
Currently, there is no universally accepted measurement for charitable impact. When donors make a strategic decision about where to deploy charitable resources, they typically rely on stats and data that communicate outputs rather than impact. For example, a soup kitchen might communicate the number of meals served – but this does not measure how much the meals have increased the quality and/or quantity of life for the beneficiaries. Communicating outputs instead of impact is also problematic for donors that want to compare organizations that focus on different burdens.
Having a database of utility weights empowers donors and charities to measure impact in a manner that is consistent with the collective perspective of society. This data can empower the non-profit sector to prioritize impact over outcomes, learn from other charities with higher impact, and optimize program strategies in a more effective manner.
There is a tremendous disparity between the impact of the average charity compared to the top charities, and this is in part because of the lack of data to communicate impact in a consistently comparable manner. Though we have not yet collected enough data to confirm our hypothesis, we estimate that the non-profit sector is currently operating at a fraction of its potential impact.
Program Implementation - Beta
The Daily Good Program will be administered starting 2/1/2021 via a daily survey that is delivered to volunteers via a mobile app or email. Participants will be asked to answer three questions about a single burden. Questions are standardized, using a combination of one Standard Gamble (SG), one Time-Trade-Off (TTO), and one Visual Analog Scale (VAS) format to gather information from each volunteer in a consistent manner.
A general overview of each burden, along with symptoms will be delivered to the volunteers as a primer to the questions. We recognize that these overviews and symptom descriptions may be subject to criticism by experts as there may not be a standard consensus for defining these burdens in each field. Our initial plan to address critiques is to publish the descriptions and symptoms along with utility scores for transparency. We also plan to adjust these descriptions over time if any of the descriptions are deemed inadequate. If any material edit is made to the burden description we plan to restart the process of collecting utility weight data for that particular burden and archive the inadequate results.
The program will be a run in a “beta” phase for the first several months. During the beta phase we aim to gather general feedback from volunteers, compare answers for each burden, determine consistency (or lack thereof) from the various question structures, and gather initial feedback on the credibility of the results relative to any established utilities for burdens published by other sources.
Initially we will aim to collect data from at least 100 unique volunteers as a sample size threshold for publishing a burden’s utility weight, however we anticipate that this threshold may increase depending on the variability of the results.
At the individual volunteer level, utility weights will represent personal preferences with regards to the utility of each burden. For some donors cataloging these results to help them prioritize their own decision making could offer value when it comes to deploying charitable resources. However, our primary aim with this program is to deliver a broader set of data that reflects society's collective perspective about each burden’s impact by publishing the results of an adequate sample size.
Our long-term goal is to provide a public database which not only makes utility weights easily accessible, but also to use the information to begin to measure and compare charitable impact using a standardized metric of $/QALY (cost per quality adjusted life-year). Additional information about how we calculate $/QALY can be found in our Giving Guide and individuals may also use our impact calculator to begin measuring impact immediately.
A loose, but arguably conservative, estimate is that top-tier charities are at least 10x more effective than the average charity in the U.S. Our vision is that the nonprofit sector will achieve 10x greater impact without increasing charitable giving norms.
Volunteers interested in singing up for the Daily Good program may do so here.
Questions about the Daily Good program or our Impact Project can be directed to our team by emailing email@example.com
Much of the work that we focus on at Effective Give is inspired by a growing movement called Effective Altruism. I first stumbled into this community in 2013 after reading The Life You Could Save written by Peter Singer – a moral philosopher and Professor of Bioethics at Princeton University. Singer is not the founder of the EA movement, but he was, and continues to be, an influential supporter of the core tenants of Effective Altruism. I can still clearly recall a moral dilemma from the first chapter of the book that functioned as a trailhead to the journey of exploring how we can help better the world.
On your way to work, you pass a small pond. On hot days, children sometimes play in the pond, which is only about knee-deep. The weather’s cool today, though, and the hour is early, so you are surprised to see a child splashing about in the pond. As you get closer, you see that it is a very young child, just a toddler, who is flailing about, unable to stay upright or walk out of the pond. You look for the parents or babysitter, but there is no one else around. The child is unable to keep his head above the water for more than a few seconds at a time. If you don’t wade in and pull him out, he seems likely to drown. Wading in is easy and safe, but you will ruin the new shoes you bought only a few days ago, and get your suit wet and muddy. By the time you hand the child over to someone responsible for him, and change your clothes, you’ll be late for work. What should you do? – Peter Singer, The Life You Can Save
I am sure that your response is as simple as it seemed to be for me the first time I read this passage. Who cares about the shoes, the suit, or being late for work – given the opportunity we are jumping in to help the child. Then Singer hits us with a ton of bricks…
10 million children under the age of 5 were dying per year for causes related to poverty. An overwhelming number of these deaths are completely preventable with low-cost interventions that are readily available in most developed nations. While this data has improved marginally since the publishing of Singer’s book, we are still facing these very tragic statistics globally. A point that Singer goes on to make is that nearly all of us could save the lives of others with fairly little effort or sacrifice. In answering the hypothetical dilemma—where we can see the child drowning—most of us state that we are willing to help, but contrasted with reality, most are not taking the necessary steps needed to save the proverbial drowning child.
At the time I was reading Singer’s book I was an active donor, fundraiser, volunteer, and was in the process of launching a non-profit. However, I was not yet thinking about philanthropy in the context of optimizing impact. I was not very strategic, and I was generally responding to the most obvious opportunities. I was reactive. I always felt that my heart was in the right place, but never realized until reading more about Effective Altruism that my head needed to be there as well. There is no doubt that many would-be beneficiaries missed out because I was not yet focusing my volunteer and fundraising efforts with adequate intention.
Truly effective philanthropy requires a balance of both the head and the heart. We must be both empathetic and strategic. That is the foundation of Effective Altruism.
Effective Altruism is a philosophy and social movement that advocates using evidence and reasoning to determine the most effective ways to benefit others.1 It is concerned with helping the proverbial drowning child and challenges us to think about the responsibility that we each have be good stewards of our resources for the purpose of contributing to the greater good. We should care about Effective Altruism for the same reasons that we care to make any positive impact. Effective Altruism provides a framework for us to do good, better. It provides us with the opportunity to do the most with both our head and heart to relieve the suffering of others. I have jokingly used an analogy to introduce Effective Altruism to people in the past – Effective Altruism is what Mother Teresa and Albert Einstein would have named their child – something that marries compassion and intellect to produce something truly beautiful.
While we are still working to collect enough data to substantiate our hypothesis, it is our estimation that the U.S. Non-Profit sector is operating at a fraction of its potential in terms of impact. Through better data, greater accountability, and additional resources that help donors measure and optimize impact we can work to close this gap within our lifetime.