In the United States, the federal tax deduction for charitable giving was created in 1917. The idea was that non-profit organizations provide tangible benefits to society, and donations should be encouraged. The tax deduction effectively lowers the cost of donations to worthy causes through a public subsidy. 

Theoretically, these tax benefits are available to anyone. But, as a practical matter, the overwhelming majority of Americans no longer receive a tax benefit from charitable giving. 

The federal deduction for charitable giving is only available to people who itemize their tax deductions. In 2017, Congress doubled the standard deduction — a flat amount that anyone can deduct from their income for tax purposes instead of itemizing. The standard deduction is now $27,700 for a married couple. This far exceeds the amount of charitable giving and other common itemized deductions (like mortgage interest) for most families. So, about 90% of Americans take the standard deduction, meaning their charitable giving does not reduce their taxes.

So, tax deductions for charitable giving have become the province of the wealthy. And the way that many millionaires and billionaires use the charitable deduction has become increasingly attenuated from its original purpose. While the tax benefits of charitable giving are immediate and immense, a large percentage of this money does not flow to working charities. 

A report released this month by the Institute for Policy Studies (IPS) found that over 40% of all money donated to charity in 2022 went to intermediaries — donor-advised funds or private foundations. 

Giving money to a donor-advised fund allows individuals to immediately deduct the full amount of the donation from their taxes. But these funds, which are generally set up by banks or other financial institutions, do not have to distribute the money on any particular timetable. (Although a contributor to a donor-advised fund technically gives up control of their money, as a practical matter, a donor-advised fund will route the money anywhere the donor wants.) It is a scheme that allows wealthy people to immediately access tax benefits while delaying the actual charitable giving indefinitely. A 2021 study found that the average donor-advised fund in Michigan distributed just 3.1% over the course of a year. 35% of donor-advised funds in the study distributed nothing at all to charity.

Donor-advised funds are also a popular way for wealthy individuals to donate non-cash assets like art, crypto, and real estate. Since these assets are difficult to appraise accurately, they can be gifted to donor-advised funds at significantly inflated values, yielding large tax benefits. In 2023, Fidelity Charitable, one of the largest donor-advised funds, reported that it received $1.5 billion in "complex, non-publicly-traded assets."

Private foundations are slightly less opaque and are required to distribute at least 5% of their assets each year. But, private foundations can fulfill that requirement by donating to donor-advised funds. Further, wages and other administrative costs count as a distribution, allowing some individuals to take a tax deduction for providing large salaries to family members. In 2021, "foundation trustee compensation totaled $2 billion," including "75 foundation trustees [who] earned $1 million or more in total compensation." 

In 2022, $85.5 billion was contributed to donor-advised funds, and $44.7 billion was donated to private foundations. Collectively, that's 41% of the $319 billion given by individuals going to intermediaries. (Among gifts of $1 million or more, an astounding 68% went to donor-advised funds or private foundations.) 

According to a 2019 study, taxpayers are providing 74 cents in subsidies for every dollar donated to charitable intermediaries. This figure includes the direct tax deduction, foregone capital gains taxes on appreciated assets, and other tax benefits. 

How charitable intermediaries can be abused

While some charitable intermediaries operate ethically and have a positive impact, the IPS report demonstrates these entities are ripe for abuse.

Barron Hilton, heir to the Hilton Hotel fortune, was an extremely generous philanthropist during his life, giving away over $1 billion to various causes. Upon his death, Hilton left $2.4 billion to the Conrad N. Hilton Foundation, a private foundation established by his father. In 2021, the Hilton Foundation paid $35,000 each to its trustees, including six members of the Hilton family. Further, the Hilton Foundation employed three individuals who earned over a million dollars per year, including Michael Buchman ($1,866,421), Yatin Patel ($1,205,636), and Jonathon Schroeder ($1,050,664). Three other employees, including President Peter Laugharn, were paid about $750,000. Overall, the Hilton Foundation reported more than $30 million in overhead, a significant percentage of the $320 million distributed in 2021. The total assets of the Hilton Foundation are now $8.7 billion. 

In 2021, Elon Musk "sold 15.7 million shares of Tesla stock for more than $16 billion." That created a potentially multi-billion dollar tax bill. But the same year, Musk donated $5.7 billion in Tesla shares to his private foundation, the Musk Foundation. The direct and indirect tax benefits of the donation were estimated at $4.6 billion. That equaled almost exactly 30% of his adjusted gross income — precisely the maximum allowed deduction for non-cash gifts to charity. That year, the Musk Foundation donated $160 million to charitable causes. Among the recipients were "a school attended by his children, a charity managed by his brother, and a nonprofit fighting traffic congestion on the highway he uses to commute to work."

It doesn't have to be this way. MacKenzie Scott received $38 billion in 2019 as part of her divorce settlement with Amazon founder Jeff Bezos. By November 2022, Scott had given away at least $14.5 billion, primarily in unrestricted gifts to working charities focused on racial equity, climate change, public health, and other issues.