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Finance for Humans

How to Blow Your Holiday Bonus

If you're not going to invest it, wouldn't it be better (for your tax burden and your soul) to give it away?

People say it to their kids all the time: The holidays are about giving, not getting. But then you finally have a big lump sum deposited into your account. And suddenly all those things you've denied yourself all year spring to mind. And yes, why shouldn't you have your own private barbecue dining boat?

Well, here are two reasons. One: taxes! Bonus season also happens to fall when you've got your last chance to make a charitable donation that will lighten your tax load. Two: human beings. You know, the people you stand to help. But also yourself. Because there's a chance that the most tangible benefits of giving away your money accrue to your own well-being.

We talked to tax guys, philosophers, and data geeks to help explain why, if you're not going to invest your bonus, it might be better to blow it on people you don't even know.

Step One: Decide Whether You Should Donate to Charity This Year

In the opinion of people such as philosophers, ethicists, your rabbi, your grandmother, and your psychologist, the answer is pretty much always yes. Peter Singer, arguably the world's leading expert on being a good person, believes that for most of us, it's a moral imperative to give. As he famously argued, if you pass a person who is drowning in an inch of water and you don't save his life, it's tantamount to murder. Not giving to organizations that could easily lessen suffering and save lives has moral implications.

But how much should we give? It depends on whom you ask. Singer advises that those of us in the bottom 90 percent of taxpayers give 1 percent of our earnings.Earn a little more than that and you can jump to 5 percent. "And the scale increases as you earn more, so eventually it gets up to a level of giving a third of what you earn, but that's only for people who are extremely wealthy and are earning millions of dollars a year," he says.

The people at the Effective Altruism movement argue we should give 10 percent.

"The main guideline," argues Matthew Scarfone, who studies metaethics, moral epistemology, and normativity at McGill University, "would be to give as much as we can, insofar as doing so imposes minimal costs on our own lives." And it's important to note what he means by minimal costs. "Many of us enjoy incredibly comfortable lives compared to others around the world," he says. "It will take a lot to significantly impact our own lives due to our donations."

Step Two: Decide Where to Give

We'd argue that where you give is actually more important than how much. One place to start looking for a good place to donate is MoneySense's The 2017 Charity 100, a list of the most effective Canadian charities.

But we think it's a mistake to limit your giving to the country you live in, because the most amount of good per dollar can be achieved elsewhere. "Focusing on high-impact, low-cost measures is generally considered more ethical—they achieve much more significant results," Scarfone says.

We're huge fans of the data-driven folks who do GiveWell. The organization was founded in 2007 by two hedge fund analysts with a simple philosophy: The most important charities are the ones that save the most lives and do the most good, per dollar spent.

Here are GiveWell's top three charities:

Step Three: Maximize Your Tax Savings

And now for the self-interest part: Let's talk dollars. We asked Jamie Golombek, managing director of tax and estate planning at CIBC Wealth Advisory Services, how to save money by giving, and he laid out the rules for us. First, understand that Canada has a two-tiered tax system. The first tier is federal. Each year, Ottawa will grant you a non-refundable charitable-donation tax credit of 15 percent on the first $200 you give to charity. And better yet, you'll get a 29 percent credit on all donations above $200. The second tier is regional. It varies depending on where you live, but credits from your province may boost your tax savings to 50 percent. In essence, that would mean that for every dollar you give, you can claim 50 cents less income.

But we're not done. Canada also has something called the First-Time Donor's Super Credit. If neither you nor your spouse/common-law partner has claimed a charitable donation tax credit since 2007, you can get an additional 25 percent non-refundable tax credit on up to $1,000 of donations.

There is a limit to how much you can give and still take advantage of tax breaks. But you probably don't need to worry about it. "The max is limited to 75 percent of your net income, which is not an issue for most people," Golombek notes with understatement.

One other way to be financially smart about giving is to donate securities—stocks or mutual funds. You can make deductions based on their fair market value, but there's an added bonus: You don't have to pay any of the capital gains tax on the appreciation. If you bought 10 shares of a stock at $80 a share a few years ago and those shares are now worth $150 per share, you can donate them, claim $1,500 in charitable deductions, and avoid the taxes you'd pay on the $700 of gains.

To make any of this count on your 2016 tax return, of course, you have to make your donation by December 31, 2016.

Step Four: Lavish Yourself With a Gift of Feeling Kinda Happy

Yes, OK, giving to charity is good for society. And not so bad for your tax burden. But lots of studies have shown it's also good for your health. Here's how:

  • Neuroscientist Jordan Grafman, the director of brain injury research at the Rehabilitation Institute of Chicago, used fMRI brain scans to show that we are hard-wired to be generous. "When people made the decision to donate to what they felt was a worthy organization, parts of the midbrain lit up—the same region that controls cravings for food and sex, and the same region that became active when the subjects added money to their personal reward accounts."

  • University of Oregon researchers Bill Harbaugh and Ulrich Mayr found that giving stimulates the release of dopamine, the pleasure chemical.

  • Giving to charity can create a sense of gratefulness — a feeling that you've got more than you need, rather than straining to get more. And studies show that people who are grateful are in better physical and psychological health.

If that's not enough to get you to give to charity, it's time to go talk to your shrink/rabbi/grandmother.

Wealthsimple uses technology and smart, friendly humans to help you grow and manage your money. Invest and save in a better, simpler way

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"MY UNDERGRADUATE ADVISER TOLD ME I SHOULD JUST FORGET ABOUT THE WHOLE WRITING THING. ‘YOU SHOULD FIND A GOOD MAN AND GET MARRIED,’ HE TOLD ME."

Margaret Atwood

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