501(c)(3)

Finance Allah shmoop What is a charitable contribution deduction Or

rather how do charitable contributions work as a tax deduction

Or even better how do the rich avoid taxes efficiently

OK admit it Your talented you worked crazy brutal ours

to get what you have millions you have bank and

you work at a bank an investment bank which pays

you five million dollars a year for the pleasure of

your company or rather the pleasure of your big brain

Attracting lucrative investment banking clients Client's willing to pay one

percent commissions to the bank when you sell them to

Google or Amazon or Facebook for five billion dollars You

know companies and clients like that you attract him so

the bank pays you handsomely Well how'd you get here

Well schooling helped you loved attending clown college for bankers

and now you want to donate a million dollars to

it This year it'll buy a ton of power bow

ties and oversized wing tips for the current students there

So how does your charitable contribution to clown college for

bankers then work as faras Your taxes go Well normally

on your last million bucks of earnings you'd be taxed

something like fifty fifty five percent That is on the

last million of earnings from your bank You keep it

and give you take four hundred fifty grand but instead

of keeping it you'll donate it you'll donate that last

million So then what happens to the taxes on that

last mill Well they go away It's essentially as if

you never earned that million dollars You get taxed on

earnings of four million box instead of five And mathematically

you've made the decision that wealth instead of personally keeping

four hundred fifty grand after taxes with five fifty going

to the federal and state man taxes well you're going

to donate a million to clown college for bankers instead

So you donate a million instead of keeping four hundred

fifty k Easy So then how does it work when

you're not just donating cash like you're the founder of

whatever dot com and you have three hundred million dollars

in appreciated stock you quote need unquote Only a fraction

of that amount to live on like at the most

A million bucks a year covers every material thing you

ever wanted and you find it just to ghost toe

overtly spend money in our oh so stressed out society

You were born the daughter of a farmer in a

school teacher and her cursed with self awareness such that

you don't buy two homes next to each other in

the expensive part of town Just a shove it in

people's faces that you can So you have appreciated stock

and you want to donate a million dollarsworth Well your

stock today trades for about a hundred bucks a share

and your cost basis on it is virtually nothing You're

the founder So let's say it costs you up any

a share to create that common Well it's a Tuesday

and the stock is bopping between ninety nine eighty seven

and one Oh one twenty one and you're going to

donate ten thousand shares Well howto those shares then get

priced well on the day of the donation Being legally

binding the broker's take a volume weighted average price called

a V wop And conveniently the price on this Tuesday

was exactly one hundred dollars and one cent So that's

the price at which the shares were donated and you

have a game then subtracting that any that it cost

you of exactly one hundred dollars for the pleasure of

making the donation Have you sold the shares and just

kept the proceeds personally Well you'd have shown a gain

of exactly one hundred dollars on which you'd be taxed

at long term gain race So like with Obama care

federal and state taxes in a blue state of about

third you tax about thirty five percent ish so that

per share you'd pay thirty five dollars in facts and

keep sixty five So in this case appreciated stock is

a bit less favorable from attacks perspective to donate versus

just donating cash that was delivered to you via your

paycheck or in some other ordinary income taxiway like bond

interest for moneys you loaned Well in the case of

the cash donation you would have kept four hundred fifty

grand after tax but in the case of a stock

donation you would've kept six hundred fifty grand So what

if you weren't the founder like you had just bought

the stock and say thirty dollars a share Waited a

few years and then decided you wanted to donate it

at one hundred bucks a share Well you'd show a

taxable gain of seventy dollars again at the one third

ish rate called thirty five percent So then your choices

Just donate a million dollars in appreciated stock never paying

tax on it or sell it and pay a thirty

five percent tax on the gain of seventy dollars or

attacks of about two hundred fifty grand keeping in this

case seven hundred fifty grand The less of a game

you have the less of attacks you are sheltering But

what if things go the other way like you paid

one hundred dollars for the stock and it then went

down like a lot toe forty bucks a share I've

been there done that Should you then give it away

No no and a half Because here the loss on

that investment is actually valuable to you on your own

From attacks perspective you may want to sell the stock

And if you do while you get to keep a

sixty dollars share loss which you can apply to offset

gains in another stock in which you made money like

you're sheltering your gains by realizing those losses Well in

this case giving it away doesn't help you with taxes

At all Give away a different stock where you've made

money and enjoy the ride Will this formula presumes that

you've held the stock an entire year In most cases

founders of companies have run them for years and years

or even decades before donating the charities But every now

and then someone visors stock for it Bucks a share

tohave it ten months later be trading it fifty and

the owner feels like it's on the precipice of disaster

and wants to just unload it fast So that would

get ordinary income treatment And they generally would unload it

real quickly on their favorite charity rather than pay all

that tax So yeah time to put that solid clown 00:05:44.267 --> [endTime] college training to use