Philanthropy

Categories: Wealth

The giving away of money or stuff.

Sounds so simple, but through the gauze-filled lenses of tax and estate laws, it's so much more complex. Start with the idea that, after you have, say, 3 homes and a jet and maybe a boat, there really isn't much else that you'd want that you can't just rent for a weekend way more efficiently. So...the price tag? Maybe $100 million? $200 million? We live in a world of centi-billionaires, so there are a whole lot of truly wealthy philanthropists above that "baseline" unit or two of wealth.

The question then revolves around how they gave away the rest. Yes, they'll pay for their kids' and grandkids' educations, buy nice toys along the way, etc. But the total cost of that stuff? Tiny. Almost rounding errors in the scheme of wealth. Take the "average" billionaire. Tens of thousands of them around the earth now. They have $200 million for toys, and the remaining $800 million is left. If they gift to their kids, they'll lose about half to taxes. If they gift to their grandkids, they'll lose about 75% to taxes. So then...why not just give it away to a charity you actually like rather than handing it over to government people who are, for the most part, morons, thieves, and/or people we just wouldn't want having our hard-earned money "for free"?

Gift rather than tax. That's the gist, anyway.

In the modern era, most wealth is contained in shares of publicly traded companies; i.e. in the old days, wealth lived mostly in the form of arable farmland and/or gold stores and/or water rights and cows and stuff. But today, a given company founder has a cost basis of, say, a penny a share in a stock trading at, say $100 a share. So almost all of that $100 is taxable. If they sell it and they live in a Blue State, they'll keep $60 a share after taxes. Then, if they want to gift that $60 to their kids, taxes will take another 40%-ish out...so it turns into $36. Then, if it's to go to their grandkids, post the generation-skipping tax, it turns into $24 or less. So yes, that original $100 in stock becomes $24 by the time it gets to a destination you'd care about. Or said another way, it costs you and your progeny $24 to give away $100.

And this is where the precepts of philanthropy begin. Do the math after you're a unit or two wealthy, and it fast becomes easy to understand why we have such nice statues at private universities.

Related or Semi-related Video

Finance: What is a Tax Deduction?102 Views

00:00

Finance allah shmoop shmoop What is a tax deduction Uh

00:06

taxes Love him Hate him You can't leave him but

00:10

you can lower them legally by being you know thoughtful

00:13

about how you spend your earnings All right How do

00:16

we do this Well let's start with the largest tax

00:18

deduction in america the home mortgage And you you the

00:23

dentist who makes one hundred fifty grand a year for

00:26

putting your fingers in wet mouth Well remember that for

00:29

individuals versus corporations we pay a graduated or quote progressive

00:35

unquote tax rate Like almost nothing On the first fifteen

00:39

grand we earned on about ten percent from fifteen to

00:42

thirty grand And then about twenty percent from thirty to

00:44

sixty grand And so on That's progressive So on the

00:47

last twenty grand of earnings you make well you might

00:50

pay say forty percent in taxes and yeah we know

00:53

the numbers own exact We're just illustrating a point Here

00:56

you have a mortgage of three hundred thousand dollars on

00:58

a home you bought for four hundred thousand dollars right

01:01

So you put a hundred grand down and borrow three

01:03

hundred The mortgage costs you six percent per year in

01:06

interest or eighteen thousand dollars to rent that three hundred

01:09

thousand before you owned the home The irs thought of

01:13

you as one hundred fifty grand a year earner but

01:16

one hundred percent of the interest on the home is

01:19

fully tax deductible So what about that last twenty grand

01:23

iii The money you earn from one hundred thirty k

01:26

to one hundred fifty k Well as faras the irs

01:29

is concerned now that you have a home you get

01:31

taxed as if you earned just one hundred thirty two

01:35

grand not one hundred fifty k actually earned Why Because

01:39

that eighteen thousand dollars in interest comes right off the

01:43

top of your earnings See there's the math right there

01:46

one hundred fifty minutes eighteen hundred thirty two taxable earnings

01:48

it's as if you didn't earn that money ever can't

01:55

all right well if you'd had no deductions on that

01:57

last twenty thousand dollars of earnings you'd have paid forty

02:00

percent or eight thousand dollars in taxes But now on

02:04

that last twenty thousand dollars thanks to your mortgage deduction

02:07

well you only have taxable income of two thousand dollars

02:11

And yes you pay forty percent on that two thousand

02:14

Or eight hundred bucks And you mumbled thank you government

02:17

for largely splitting the cost of my mortgage with me

02:20

The american dream is alive and well that's what you

02:23

say Okay And thank you jay There are other deductions

02:26

beyond home mortgages of course but well you get the

02:29

gist here of how they work from a taxpayer's perspective

02:33

Deductions like those from your home mortgages are a good

02:36

thing Common personal deductions also include things like prepaid healthcare

02:41

costs and the cost of feeding quote dependent unquote children

02:45

Aii those noisy things sleeping in your spare bedrooms until

02:49

they're eighteen Okay so those air personal deductions things that

02:52

individual citizens take But what if you're a corporation Well

02:56

in a way it's kind of easier Think of most

02:58

corporations is having a flat thirty percent tax from the

03:01

first dollar they make just keep things simple Participation trophy

03:04

company in kameda one hundred million dollars last year and

03:08

paid thirty million in taxes They netted seventy million after

03:12

tax The company really needs a new trophy smelting machine

03:16

because with so much demand for participation trophies of late

03:20

while the old one is running dullah with mediocrity the

03:24

company spends forty million box on the new machine knowing

03:27

that it will be worthless in ten years either because

03:30

it wears out or because the country gets riel or

03:33

you know simply remembers to you know have a nice

03:35

day participation trophy land Welcome to it They'd appreciate forty

03:39

million dollars in equal parts of four million box each

03:42

year over ten years so that in the next year

03:45

when they again or in one hundred million dollars well

03:47

they now get to deduct four million bucks and appreciation

03:51

from their smelting machine against their hundred million dollars in

03:55

earnings So again as faras the irs is concerned they

03:58

didn't really earn one hundred million dollars even though they

04:00

did They earned quote on ly unquote ninety six million

04:04

and yes they still pay their thirty percent tax Only

04:07

now instead of paying it on a hundred million bucks

04:09

it's paid on ninety six million of earnings or point

04:13

three times ninety six or twenty eight point eight million

04:17

in taxes they did Abducted from their taxes The four

04:21

million box expected value decline from their smelting machine Right

04:25

It goes down four million a year in value from

04:27

the forty they paid They received essentially a credit on

04:30

their taxes of one point two million dollars So instead

04:34

of that year's depreciation costing the company four million bucks

04:38

well it really cost them more like two point eight

04:41

million If you ignore a bunch of other things like

04:42

the original capital cost of the machine what else they

04:45

might have done with that money oven you know via

04:48

smelting machine Think think Corporate jet Yeah those g sixes 00:04:52.774 --> [endTime] are surprisingly tasteful

Find other enlightening terms in Shmoop Finance Genius Bar(f)