We spent a lot of time last month dealing with headaches around tax deductions and processing fees. We thought we’d share our experiences with these headaches, and how they get in the way of donors’ abilities to give as effectively as possible. We’re thinking about how to better deal with these issues in 2012.
Tax deductibility shifts the focus from “having impact” to “navigating bureaucracy”
Many governments, including the U.S., provide very large benefits for people who support government-recognized charities. These benefits can be the equivalent of a 1:2 or so donation match. The goal here is admirable: encourage generosity and increase the flow of funds to charity.
The problem is that every country has its own (generally onerous, expensive and long) process for becoming a recognized charity. Last month we dealt with the following issues:
- The Schistosomiasis Control Initiative (SCI), our #2 charity, is a registered charity in the U.K., but not in the U.S. We’re confident that it would meet the U.S. criteria for a charity – its activities consist of treating people in low-income countries for parasitic infections – but because it hasn’t gone through the process of registering a U.S. affiliate (which can take months), U.S. donors can’t get tax deductions for supporting it. We don’t want U.S. donors to have an incentive to support other charities when this is one of the best we’ve found, so we’ve worked to find a way …
- We worked with Imperial College Foundation to set up a Google Checkout account, so that the Imperial College Foundation could take donations for the support of SCI.
- This meant working with contacts we hadn’t worked with before, and it took some time; in the meantime, we took donations ourselves for the support of SCI (i.e., offering donors the option of giving directly to GiveWell, which is U.S.-registered, and earmarking their donations for the support of SCI).
- Imperial College Foundation then had its Google Checkout account suspended – we still don’t know why, though we believe it has to do with an administrative technicality – returning us to a state where the only option for U.S. tax deductibility is to give directly to GiveWell for the support of SCI.
- The Against Malaria Foundation, our #1 charity, has taken the unusual step of obtaining charitable status in more than 10 countries. This likely took a good deal of effort, but has been very helpful in removing any disincentive for donors around the world to support it. It was great to see a European institution donate over $50,000 (we believe this is the same institution that expressed interest in giving the same amount to VillageReach last year, but ultimately didn’t go through with it because it couldn’t get a tax deduction in its own country). But even here there have been problems:
- We were recently alerted that even though AMF is registered as a charity in Australia, it is not tax-deductible for donors in Australia. We’ve never considered the possibility that a country might have separate processes for these two things (the U.S. doesn’t); this took us by surprise and resulted in our having to email all those who had donated to AMF from Australia in the past to let them know about the error. There have been some refunds as a result.
- A Swedish donor expressed interest in giving a large amount to AMF, but Sweden is not among the many countries where AMF is registered. The gift did ultimately go through, though we don’t know whether the donor got the tax deduction. There’s something a bit absurd to us about an organization like AMF – which clearly has a charitable purpose and has gone through proving this to over 10 different countries – still facing this problem.
- We’ve also dealt with multiple donors who wish to give stock rather than cash. This sort of gift can have major tax advantages, but it also involves a much more complex process both for the donor and for the charity. Since we have experience with taking stock donations and our top charities don’t, we’ve been facilitating these transactions through our own donor-advised fund.
One might defend these regulations, saying something along the lines of: “Sure, these laws make things more complicated, but they give people incentives to give more to charity – that’s a good thing.” This is partly true, but it isn’t quite that simple either. While SCI – one of the best organizations we’ve found for a donor looking to help the poor – is not a U.S. recognized charity, the U.S. Golf Association is. So is the National Cattle Men’s Beef Association (whose mission statement lists “increase consumer demand for beef” as its first point).
Much of charitable giving supports political advocacy (so the government is effectively subsidizing people to try to influence it), or local places of worship, or to foundations that give away money extremely slowly, or to alma maters whose balance sheets don’t seem to be crying out for government subsidies. A 2007 study estimates that only 30% of giving is even attempting to help the poor, and we don’t know how much of that 30% is effectively helping the poor; we believe the bulk is focused on the donor’s experiences, not on the recipient’s.
In addition, the incentives created by this system can be complex and strange. For example, Elie is married and I’m not, so his standard tax deduction (the tax deduction he gets if he chooses not to itemize charitable and other deductions) is much higher than mine. That means it looks like I will be getting a tax benefit for 2011 and Elie won’t. (If he owned his residence rather than rented it, he likely would get the tax benefit.)
We see a lot of room for improvement in the way the charitable tax deduction works. In particular, we’d like to see it become easier (and quicker) for charities delivering proven health interventions to poor countries to get the same tax status accorded the U.S. Golf Association.
There is no easy, reasonably priced way to give large donations online
We want people to be able to give to charity quickly and easily. So far, the only way we’ve found to facilitate this involves credit cards – and credit cards involve processing fees. We haven’t been able to find a standard processor with lower fees than PayPal’s, which exceed 2%.
2% may not sound like much, and on a $100 donation, it isn’t. But when someone gives $10,000 that means over $200 is spent on processing. We simply don’t see a good reason for this to be the case. It becomes better for such donors to give by writing a check, even though this is more time-consuming for both the donor and the processor, and much harder for GiveWell to track (in order to evaluate our own influence).
Fortunately, Google offers fee-free processing through 3/31/12 to nonprofits that are enrolled in its Google Grants program and using Google Checkout. Unfortunately, trying to take advantage of this raises all the same issues discussed in the previous section: now, instead of just advantages for charities that have gone through various governments’ registration processes, there are also advantages for charities that have gone through Google’s registration process (which can also take a significant amount of time).
Neither of our current two top charities have set up free donation processing with Google. We are, so we’ve been taking donations for the support of our top charities for those who wish to avoid fees.
Ultimately, we believe the better long-term fix will come from services like Dwolla, which deals with directly linked bank accounts (rather than credit) and processes transactions for $0.25 (or less) each, regardless of size. But we don’t believe that most of the donors using GiveWell’s research are signed up for these services (and signing up for them involves multiple verifications, including a bank verification that can take days). We aren’t sure yet how we’re going to handle the next couple of years, after Google stops covering fees and before a better payment system has entered widespread use.
Another major issue is that people making large donations very frequently run into problems with their credit card companies (due to the fact that they are spending so much more on a single item than they usually do). In our experience, about half of donations over $5,000 are declined the first time a donor tries to make the gift and are only cleared after he or she speaks with his card company. This can be particularly stressful for people trying to make last-minute gifts. Services like Dwolla may avoid this issue as well, due to the direct bank account link (we aren’t sure).
For 2012, we’re considering:
- Continuing our shift from asking donors to give directly to charities to asking them to give to GiveWell for the support of those charities. We currently have giving to GiveWell as the primary option for SCI (since we’re a U.S. charity and SCI isn’t) and as a secondary option for AMF (for those seeking to avoid processing fees). We may shift toward having this be the primary option for all charities. This could greatly simplify all of the other fixes we’re working on, since whatever solutions we come up with will be easy to implement for all recommended charities. It would also simplify our own data collection and reporting. We will always provide an option for donors to support our recommended charities directly, but this option may become de-emphasized.
- Encouraging past donors to consider changing how they give. We may encourage people giving very large amounts ($5,000+) to use donor-advised funds and give appreciated stock, to realize full tax advantages and avoid fees. This will be a lot more hassle for them and for us, but the financial advantages may be worth it. We may also encourage people to make their annual gifts earlier in the year, to avoid the stress that can come with complications in trying to make gifts just in time for the tax year.
- Working with non-traditional payment processors with lower fees.
- Obtaining charitable status for ourselves in other countries so that donors giving to GiveWell for the support of recommended charities can obtain tax deductions.
Good giving is difficult enough already
We started GiveWell because we know there are people out there who want to give for maximal impact, but have minimal time to spare. We’ve worked hard to create a resource allowing these people to support outstanding charities as quickly and easily as possible. Unfortunately, the complexities of tax deductions and processing fees are working against this mission.
We’re doing what we can to deal with these issues as well. More broadly, we expect that the issue with processing fees will eventually see a good resolution, since cheaper processing methods are available and fighting for market share. We’re less optimistic about the tax code, which may only get more complicated – and more distortive when it comes to picking a charity – over time.
I faced the issue wrt SCI. I’m a French taxpayer and resident. When I asked Alan Fenwick about it, it seemed SCI was not eligible to tax deduction in France. Yet it is open that my tax statement would allow me to report my donations along with justification that SCI corresponds in all relevant respects to characteristic recognized charities as of French tax code.
However, as a personal matter, this is of lesser importance for me since my donation to SCI is fairly modest, as are my taxes. It’s likely I wouldn’t change much my monthly donation amount if I could get a tax deduction-but true, I can’t rule out I would do it, if slightly.
Given that I know of no comparable domestic effort to assess and rank charities, and of no France-based (or -recognized) charity that would be as cost-effective as SCI, it seemed clear to me that I should donate irrespective of possible tax deduction. But I suspect the issue might prove much different above a certain amount of donation.
Credit processing fees for charities in NZ dropped from 2% to 0.5% in December 2011. Possibly a response to alternate mechanisms, although we have nothing like Dwolla available yet.
Most of our banks do have good online services for ‘bill payment’ or even international transfers. For the charity these have the downside of dependency on the donor for enacting the transaction and then telling you what they did. Credit cards allow you to close the transaction immediately, and are easier for donors who lack web-savvy.
Secondly, NZ recently revised it’s charitable status laws and political advocacy is no longer eligible. Greenpeace is currently appealing removal of their Charity status, but remains tax-deductible.
1. See also Beware Trivial Inconveniences.
2. I take issue with the post’s suggestion that a charity is legitimate if and only if it helps the poor. I don’t think that this reflects Holden’s stance or GiveWell’s stance, but the post gives the impression that it does.
3. The complicated tax laws are only the tip of an iceberg of immense institutional bureaucracy.
4. Holden, thank you for the interesting information (e.g. about electronic means of transferring large amounts of cash).
I dont care about the tx deduction so i use the online services such as justgive or network for good so that i can give anonymously. I do not want a lot of email, maill etc from charities and i am convinved they share my name and contact info with other non profits. I think this will be less of an issue with your chosen groups and i am very pleased to have yr help with my philantropic endeavors, modest though they are.
I have a brokerage account with Schwab. They have made it very for me to make tax-deductible charitable donations with nearly zero overhead. I believe Vanguard has a similar program. Not only are my gifts tax-deductible, I can donate the money in one year and nominate the recipient in any later year.
This is a thought-provoking post, thank you.
I gave a sum to SCI as a result of reading your recommendation. As a UK resident and taxpayer I was able to do this through their website free of any transaction fees. I received a personal acknowledgement by email from SCI the next day.
I assume that the essential bureacratic nugget you identify is here to stay, and probably for good reason: as a UK citizen I see more fraud-related downsides in allowing UK tax-payers to deduct payments to non-UK charities than upside.
Perhaps one way to address this issue is to expand your recommendations from two main charities to a portfolio of, say, 20. Each of the portfolio might be required to have a similar marginal return on donated income expressed in quality-adjusted life years or some other metric. (Some may be higher return than others, but as you note elsewhere, the risk/return principle is likely to hold).
This would make available a portfolio to donors, lessening overall risk (some charities would outperform, some underperform, but the donor’s outcome would have a higher probability of being the mean return of the sample).
This may also open up a more interesting rationale for donating directly to GiveWell, which would be uniquely well placed to ‘invest’ my funds in the “GiveWell20 Fund”, returning to me a statement showing how much each individual charity received from me, but sparing me the hassle of diversifying my own donation.
Thank you for this post.
I take it you will provide updates when you obtain charitable status outside of the U.S.?
I am currently an occasional donor to Givewell/AMF, and the latter’s difficulties in obtaining donation-deductible status here in Australia is particularly frustrating for me. All rather than just a majority of my giving would probably be to a Givewell recommended charity if the tax issue were resolved.
Jordan – sorry for the trouble you’ve had. If/when AMF’s tax status in Australia changes, we’ll certainly try to notify our donors there. We’re not currently planning to prioritize attempting to become tax deductible ourselves in Australia, due to the amount of time required and the limited success that AMF has had in that pursuit, but we continue to hope that they will eventually succeed.
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