Let’s say that I’m fabulously wealthy and don’t need the money. Nevertheless, my services are in demand, to the point that someone would pay me for them. For example, I’m commissioned to do a work of art for $50,000.
Now, if I take the money and then donate it to my favorite charity, income taxes will be paid on it, and then the amount I donate to charity will be less than the original $50K.
So let’s say I tell my patron to send the $50K directly to the charity in payment of my services. Uncle Sam doesn’t get a cut. Or does he?
Does this sort of thing go on? And if so, is the money still taxed?
Note: This is all hypothetical. I really DO need the money, and I’m not an artist anyway.
Would not your patron already have paid tax on the $50,000? If he were taxed at 25%, he’d have had to earn $62,500 to pay you - or the charity - that $50,000.
I think two different things are being confused – the pay to the artist and the pay to the patron who has the money to pay the artist. Plus there is sales tax to consider in most cases.
If Pattie pays Artie $50,000 for some work, normally Artie has to pay income tax on that income. Let’s assume Artie is in the 25% tax bracket. If they are in New Jersey, the state also wants 6% in state sales tax. This has nothing to do with whether Pattie had already paid income tax for whatever he did to earn the money that enabled him to have it in order to buy the painting.
Now, if Artie says, “I don’t want any pay for this painting, but please donate $50,000 to TheWorldsBestCharity instead,” and Pattie does so, it would seem to me (and I am not an accountant or tax expert) that Pattie now has a $50,000 deduction for a charitable donation, and Artie has no income. Or else: Artie has BOTH $50,000 income AND a charitable donation. Which means he essentially has “written off” the entire amount of his income and owes no taxes at all on that transaction. Either way, Uncle Sam gets nothing unless the charity owes taxes. If it’s a bona fide tax-exempt educational organization, they don’t.
A real tax expert may come along and tell me I’m all wet, though.
You’re all wet; sorry. Artie controlled where the money went; that is, Artie told Pattie, “make the check payable to TheWorldsBestCharity.” Thus, Artie cannot evade taxes on that amount.
You may be right, but it doesn’t make sense to me. I know I’m not a real tax expert; maybe you are, or maybe one will come along after a while and provide some actual facts.
If you’re correct, then the way Artie could avoid taxation would be to simply donate the entire amount. He might have to pay the income tax first and then get a refund later, though.
How about you stop answering GQ questions with guesses? (Why do people insist on doing this?)
It may not make sense to you, but Campion is correct, under US law.
(I tried posting this 3 times yesterday, and got an error each time. Luckily, I had it in my clipboard.)
So you’re telling me, that if someone comes up to me and says here’s $50,000. I tell them I don’t want it give it to some charity. I’m going to have to pay taxes on money that I’ve never touched?
Now I understand if someone where to give me a check, but if someone donates money in my name but it doesn’t come from me then how can I be taxed on it? I don’t see what I’m missing unless it’s the commission of the painting.
I don’t know much about the US tax code, but wouldn’t the money not be taxed as it was never received? What is the term, constructive receipt?
Think of how deferred compensation works. You offer to pay me $150,000 / year. I only need 100K to live so I ask you to defer the other 50K to a future date (age 65 say). You will only pay income tax on 100K this year as you never received the other 50K.
Control is all well and good and is part of what makes income recieved, but according to my EA Bro, you also generally need a *Benefit * also. Now, if in our OP’s case, the Artist did not attempt to claim a Contribution, there’d be no *Benefit * to him, thus no *Income. * If this occurred and the IRS tried to turn this into a Taxable event, my Bro sez that the 9th Circuit would laugh it out of their Court. My Bro sez he is making the following assumption- that the artist worded it like “I like dudes who donate to this cause- so donate heavily to it and I’ll gift you with a painting”.
However, still, it all depends. Say the Artist donated the art to the Org, then the patron sent a donation to the Org and got the art back in exchange. In this case, the Artist would get a Contribution- how much is VERY complicated, however. But in general, the Patron would not get a deduction unless his “donation” was higher than the “FMV” of the art.
If the Patron wrote the check to the artist then the artist signed it over to the Org, then it’d be a different kettle of fish- the Artist would likely be taxed and then get a deduction for the same amount (which might not all be deudctable in one year due to AGI limitations).
Control does not mean Income- the Directors of a 501C Non-Profit have Control over where their Org’s money goes, but that doesn’t mean those gifts become Income to them.
This is, of course, not the OP, but it is a way that one could change the outcome by changing the factual situation. (This is also what Edward the Head did: by positing an inapposite factual situation, the outcome changes.)
The point is this: there are ways to structure your behavior so that it is tax avoidance, which is legal, rather than tax evasion, which is not. Oftentimes, the value a tax attorney brings to the table is the ability to structure a transaction such that taxes are avoided. As DrDeth’s example shows, by simply changing the structure of the transaction, one can change the taxable event.
Another thing to think about is the charitable giving limits. If I recall correctly, you can only take charitable deductions up to a certain percentage of your income (I think it is 50% in some cases and 30% in others). Above those limits, the charitable donation is not recognized in the current year, but may be carried forward or back under the rules.
