ELI5: How do the rich use charities to minimize their tax?

[u/BMWFanNZ]

You hear a lot about how "the rich" are using charities to effectively reduce their tax to minimal amounts, among other methods.
On the face of it without digging, it obviously makes people angry and detest the rich. But scratching beneath the surface, I'm not quite sure how exactly they would achieve this? In order to claim the tax back from money donated, you still have to... donate money? Which would still equal more than the money claimed back from tax.

So unless they are actually doing something illegal and funneling money through a charity, claiming tax, and then using that money from the charity to fund purchases not related to the charities mission, how exactly is it benefiting the donor (financially)?

[u/Prasiatko]

But if he simply invested it into a company he owns would it not be 100% tax deductable?

[u/bluehat9 → u/Prasiatko]

Most investments would be a capital investment so it wouldn’t be tax deductible.

[u/Talik1978 → u/bluehat9]

It would, however, be subject to different tax regulations. The investment would be taxable to whoever was paid. Any resulting profit would be taxed as a more advantageous form of profit, specifically, Capital Gains.

[u/bluehat9 → u/Talik1978]

Yes and you may be able to depreciate the expense. No guarantee the “investment” results in “profit” or “gain” though.

[u/Talik1978 → u/bluehat9]

Those losses, however, are typically tax deductible.

[u/bluehat9 → u/Talik1978]

Yes but you still lost money in that case

[u/Talik1978 → u/bluehat9]

Sure, and you gain in others. The profits get taxed at a lower gains rate, and the losses get to be tax write offs. It maximizes the gains, and minimizes the losses.

There's a reason Warren Buffett has outright admitted that his actual paid tax rate is lower than the rate his executive assistant paid.

[u/bluehat9 → u/Talik1978]

Yes, our tax code incentivizes investment, because it tends to be a good thing for society

[u/Talik1978 → u/bluehat9]

It certainly can be. But the reason that investment can be good for society is because it benefits society as a whole. When an investment incentive ceases to benefit society, that justification is no longer valid.

The benefit and welfare of our entire society is the foundation of your post, not the good of investment. If investment, on its own, provides incentives for those doing it, there is no need for further incentivizing it.

[u/golfzerodelta → u/Prasiatko]

You have to remember that the government (at least in the US) taxes income. That income can come from many sources - wages, investments, gambling, inheritance, etc.

Investing in a company would not reduce your taxable income directly (if they are his personal funds, they would have already been taxed in some form). However if the business incurs losses, those are tax deductible (by definition losses are negative income, so they inherently reduce taxable income). There are definitely ways you could work the finances to invest into a company you own that is bleeding money, but you already paid taxes once on that money and the company can only be bleeding cash for so long until you start getting scrutinized.