 Overview
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 workplace@effectivegive.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.
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