Tax Savvy Donating

November 3, 2024

Taxes & Insurance

I hate seeing “Ba’al Taxschis.” That is when poor tax planning leads to needless overpayment of hard-earned dollars to the IRS. I am not a tax professional, but in my line of work, I see tons of Ba’al Taxschis. Surprisingly, this waste occurs at all levels of the wealth spectrum. I’ve personally seen Mega-wealthy people unwittingly forgo multi-million dollar tax deductions, just as I’ve witnessed yungerleit mistakenly lose out on earned income tax credits.

A Nuanced Ba’al Taxschis Shaila

The following Ba’al Taxschis question is more nuanced. A well-meaning fellow wrote a post on LinkedIn, asking why the communal gifting that is offered to klei kodesh before yomim tovim is done in the form of charity. Isn’t it more respectful to direct those funds toward increased salaries? The fellow’s heart is definitely in the right place; Rabbeim and Morahs deserve and need respectable salaries. But once you take taxes into account, his suggestion is not as simple as it seems.

Let’s use one of Klal Yisroel’s most famous couples to illustrate the point.

Mr. Pitkin’s Troubles

Mr. Pitkin didn’t know where to turn. Smoke from the nearby Pencil Factory Fire had made their tiny apartment virtually unlivable. The Pitkins’ clothing and furniture reeked of smoke, making it difficult for him to breathe. The simple family needed to dry clean all their clothing, and some furniture would have to be replaced, too. But how does a man from the Lower East Side come up with $100?

Hyman Steps Up

Mr. Hymie Himmelstein noticed his employee’s long face. As foreman of the Marvin K Blister Pencil Factory, it was Hymie’s job to make sure that his employees were OK. Mr. Pitkin was also a neighbor and friend, so Hymie was really sympathetic.

Hymie knew that Mr. Blister would not be willing to help his employees with an extra penny, even though the smoke had come from his factory. But, thanks to his new lucrative job as foreman, the Himmelsteins now earned more than they required to pay their bills. Hymie was sure his sharp but kind wife Zelda would agree to share their newfound fortune with the Pitkins.

A Factory Bonus

But he wanted to help his friend in the most respectful way possible. Instead of just handing over the $100 as a gift, he would give it to Mr. Pitkin as a trumped-up employee bonus. Marvin K Blister would be happy to take the credit, as long as it didn’t cost him a penny.

Zeldah Is 10 Steps Ahead

As he expected, Zelda was on board. But in her typically tart way, she berated him for overlooking the obvious tax ramifications of his proposed “bonus” to Mr. Pitkin.

“Oy, Hymie! Your heart is in the right place, but it’s a shandah how little financial education you got in RJJ! If the government taxes the $100 that we want to give the Pitkins, we can only afford to give them $75.

And by structuring it as an employee bonus, they will lose even more money to taxes, too. It’s nice that you want to make it seem like this is a bonus, not a gift, but an employee bonus is taxable. Only $50 of the $100 we give up will go to the Pitkins! The IRS will take the rest!”

The Ladies Auxiliary Approach

“Zelda, I must admit. I may be the foreman of a major pencil operation, but I know nothing about taxes. You are raising excellent points. But what can we do? You can’t fight City Hall… er… the IRS.”

“Tatteleh. Zorg zich nisht. The Ladies Auxiliary does this all the time. Here’s what we’re going to do so the Pitkins, nebach, get the full $100 while maintaining their dignity, too.”

The Free Loan Society Steps Up

“We will donate $100 to the Anshei Kartoffel Free Loan Society Fund and have them gift it to the Pitkins. As a tzedakah donation, we are entitled to a charitable deduction, avoiding taxes on this $100 gift. Mr. Pitkin won’t have to pay taxes this way either, because, unlike an employee bonus, gifts from friends or a charity are not taxable income! So every penny of our chesed will be available for them to use.”

Mr. Genugshein Finesses It

We can also protect their dignity this way. Mr. Genugshein, head of the Free Loan Society, will explain to Mr. Pitkin that since the fire damaged some people’s homes, funds were made available to those affected.

And takeh, I’m sure we can raise more money if the same kind of damage occurred to other members. So it’s all kosher, v’yosher, and emesdig, bezras Hashem.”

Happily Ever After

“Zelda, I always say you’re a genius, k’naynehara, mamash ah halbe parnassah! I don’t know where I would be without you!”

“Oif gehakte tzuris, Hymie! That’s where you would be, mein tayera tzaddik. But BH, we have each other. So, it all works out perfectly fine, tzum gitten.

Now, let’s get this mitzvah done. Please go right to the bank, Hymie. I’m going now with Heshy to get some herring for Mr. Blister’s kiddush.”

“All right, Zelda. Whatever you say, I’ll do it.”

(As an aside, were all yidishe mammahs back then dominant, snippy, albeit kindly figures? Or was that also part of Rabbi Kundah ZL’s poetic license?)

L’maisah, Is it Worth It?

So, there you have it. Thinking about the tax ramifications of this gift, Zelda basically doubled the net effect of the gift in the Pitkins’ pocket. No Ba’al Taxschis. Similarly, when you apply this mashal to the comment on LinkedIn, communal gifts are maximized when given out of the context of an employer relationship.

Is it less dignified? I think it can be viewed from different angles, and even if it is a bit less dignified, is it worth handing over a huge chunk of the benefits to Uncle Sam for that reason? Is there another solution which would be both bakavodik and tax efficient?

**At Least Think About the Tax Ramifications**

I leave these questions to people with greater insight than I do, but my primary point that taxes matter significantly is one that I will keep reiterating. Learn the basics. Hire a good tax professional. And stop committing Ba’al Taxschis.