Who gets the charitable deduction credit?

September 20, 2011 9:44 AM

When an author, political figure or other speaker donates their speaking or appearance fee to charity, do they garner any tax benefits? Does this donation show up as a charitable tax deduction on their tax form? Does it show up as a charitable donation on the sponsoring organization's tax form?

If they are able to put the gift as a charitable deduction on their tax forms, is it possible to roughly calculate the amount of taxes they are saving, which is a form of compensation? For example, if they donate a $10,000 appearance fee, do they save $3,500 on their taxes (10,000 x 35%, which is the highest federal tax bracket, assuming these people make enough to put them well within that braket for the year)?

posted by 2bucksplus to work & money (7 answers total)

First of all, it depends whether they receive the fee and donate it or whether a donation is made in lieu of their speaking fee. If the latter, the donation is, to keep it short, an expense of the party bringing in the speaker and appears on its tax return.

If:
a) the speaker receives money to him personally or via a pass-through corp. like an LLC,
b) the speaker already has enough deductions on his Schedule A to exceed the standard deduction before the charitable deduction,
c) the speaker does not donate more than the cutoff for charitable deductions,
d) the speaker's taxable income with or without the deduction exceeds the 35% bracket threshold,

then yes, the tax savings from making the donation is 35% times the amount donated. If any of my qualifications aren't true the amount saved is less.
posted by michaelh at 10:03 AM on September 20, 2011

I think you may be misunderstanding how tax deductions work. Basically, it's a way of saying "For tax purposes, I didn't earn this money."

If you make $100,000, you're taxed on that $100,000. If you then get $10K in speaking fees and donate that $10K entirely to charity, you're taxed as though you still only made $100K. (There are limits on how much you can donate, and other caveats and details, but that's the short version.) Essentially, by donating a speaking fee, those speakers 'break even.'
posted by Tomorrowful at 10:03 AM on September 20, 2011

Essentially, by donating a speaking fee, those speakers 'break even.'

No, they don't. Which is why such honoraria are usually donated directly to the charitable organizations, so they wouldn't show up on the speaker's tax forms at all, either as income or as a deduction.

The reason this is usually done is that charitable donations are deductible for income tax purposes but do not count as "expenses" for self-employment tax purposes. So if a speaker accepts a $10,000 check for an engagement, he owes $1,530 ($1,330 this year only) in self-employment taxes. Here's the thing though: even if he gives the entire remaining $8,470 to charity, he still owes income tax on half of the $1,530 he paid in self-employment taxes. So if he gives the entire $10,000 check to the government, he's out about $1,800 of his own money. Clearly, this is not a desireable outcome from the perspective of the speaker.

More than that, many people who are going to be in a position to demand honoraria earn enough that they're subject to limits on the amount of charitable donations they can claim as a deduction. So they might not even be able to claim the entire $10,000 as a deduction, which would increase their liability even further. On the flip-side, if it's the rare occasion that a person who doesn't make enough to itemize their deductions that's getting the check, they wouldn't receive any benefit from making the donation.*

No, it's more convenient for all involved for the organization to just give the check directly to the charity. Which is what usually happens.

Regardless of who gets the money, this is going to show up as a legitimate business expense on the part of the hosting organization, which will get to count it as such on its tax return.

*Only applies to honoraria which are less than the standard deduction, because otherwise that donation alone would trigger itemization.
posted by valkyryn at 10:14 AM on September 20, 2011 [3 favorites]

No, they don't

Gah. Valkyryn's quite right; I completely forgot about all the fun additional factors that come into play like self-employment tax. Ignore me. I am wrong. My words are poison. And lies. Poisonous lies. From lieville.
posted by Tomorrowful at 10:20 AM on September 20, 2011 [3 favorites]

I think you may be misunderstanding how tax deductions work. Basically, it's a way of saying "For tax purposes, I didn't earn this money."

Actually.... you're misunderstanding how tax deductions work. Basically, they're a way of the government saying "Because we want to minimize the regressive nature of taxes and/or want to encourage certain kinds of spending, we'll let you exclude certain kinds of spending from your net income."

This is different than just not counting it as income for two reasons. First, payroll taxes, e.g. Social Security and Medicare, are levied on gross income, not net income or adjusted gross income, and you pay that even on money you later deduct for income taxes. Second, your tax bracket and certain phase outs and limits on deductions are triggered by your AGI, so it's advantageous to deduct as many things above the line as possible. Which is why Congress has limited those deductions to things like business expenses.

Charitable deductions are a below-the-line deduction, meaning that while they can lower your taxable income, they do not lower your AGI.

Which is why if a speaker is going to donate an honorarium to charity, the hosting organization gives it straight to the charity. The thing about honoraria is that they are, by definition, gratuitous payments, i.e. payments made which are not intended to satisfy any debt. So they are subject to income and other taxes when received, but not receiving them does not trigger any tax implications the same way that, say, having a medical bill written down counts as income.
posted by valkyryn at 10:21 AM on September 20, 2011

Preview FTW, I suppose.
posted by valkyryn at 10:22 AM on September 20, 2011

It's a little difficult to discuss this in a vacuum because of the possibilities michaelh outlines. I do public speaking (in addition to MeFi work) and also donate to charity, usually from my own money. How that works for me is this

- I have some amount of money I am getting paid for this event, I can

1. have the org donate it to a charity, possibly in my name, in this case I never see it and it is not income for me
2. accept it, at the point at which it is given to me, I am on the hook for taxes for this money
3. accept it and donate it to a charity myself. I will owe taxes on this money but may also receive a charitable deduction depending on a host of other circumstances

- I donate to charities, I can

1. have an org just cut my check directly to my charity
2. have them give it to me and I donate it

So depending on my personal situation with deductions for the year [what limits I've reached, what IRA payments I'm making, how flush I'm feeling] some of these might make sense differently. So while I'm aware that you're talking about big money speakers, it may be easier to look at it in a small money way because the way it all comes out in the wash is pretty similar to any other independent contractor work.
posted by jessamyn at 10:24 AM on September 20, 2011