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Finance: What is a Charitable Contribution Deduction? 0 Views
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Transcript
- 00:00
Finance Allah shmoop What is a charitable contribution deduction Or
- 00:08
rather how do charitable contributions work as a tax deduction
- 00:12
Or even better how do the rich avoid taxes efficiently
- 00:17
OK admit it Your talented you worked crazy brutal ours
- 00:21
to get what you have millions you have bank and
Full Transcript
- 00:25
you work at a bank an investment bank which pays
- 00:28
you five million dollars a year for the pleasure of
- 00:31
your company or rather the pleasure of your big brain
- 00:34
Attracting lucrative investment banking clients Client's willing to pay one
- 00:38
percent commissions to the bank when you sell them to
- 00:41
Google or Amazon or Facebook for five billion dollars You
- 00:44
know companies and clients like that you attract him so
- 00:48
the bank pays you handsomely Well how'd you get here
- 00:51
Well schooling helped you loved attending clown college for bankers
- 00:55
and now you want to donate a million dollars to
- 00:57
it This year it'll buy a ton of power bow
- 01:00
ties and oversized wing tips for the current students there
- 01:04
So how does your charitable contribution to clown college for
- 01:06
bankers then work as faras Your taxes go Well normally
- 01:10
on your last million bucks of earnings you'd be taxed
- 01:13
something like fifty fifty five percent That is on the
- 01:15
last million of earnings from your bank You keep it
- 01:18
and give you take four hundred fifty grand but instead
- 01:21
of keeping it you'll donate it you'll donate that last
- 01:24
million So then what happens to the taxes on that
- 01:27
last mill Well they go away It's essentially as if
- 01:30
you never earned that million dollars You get taxed on
- 01:33
earnings of four million box instead of five And mathematically
- 01:36
you've made the decision that wealth instead of personally keeping
- 01:39
four hundred fifty grand after taxes with five fifty going
- 01:44
to the federal and state man taxes well you're going
- 01:47
to donate a million to clown college for bankers instead
- 01:50
So you donate a million instead of keeping four hundred
- 01:52
fifty k Easy So then how does it work when
- 01:55
you're not just donating cash like you're the founder of
- 01:59
whatever dot com and you have three hundred million dollars
- 02:02
in appreciated stock you quote need unquote Only a fraction
- 02:06
of that amount to live on like at the most
- 02:08
A million bucks a year covers every material thing you
- 02:11
ever wanted and you find it just to ghost toe
- 02:14
overtly spend money in our oh so stressed out society
- 02:18
You were born the daughter of a farmer in a
- 02:19
school teacher and her cursed with self awareness such that
- 02:23
you don't buy two homes next to each other in
- 02:25
the expensive part of town Just a shove it in
- 02:28
people's faces that you can So you have appreciated stock
- 02:31
and you want to donate a million dollarsworth Well your
- 02:35
stock today trades for about a hundred bucks a share
- 02:37
and your cost basis on it is virtually nothing You're
- 02:40
the founder So let's say it costs you up any
- 02:43
a share to create that common Well it's a Tuesday
- 02:46
and the stock is bopping between ninety nine eighty seven
- 02:49
and one Oh one twenty one and you're going to
- 02:51
donate ten thousand shares Well howto those shares then get
- 02:55
priced well on the day of the donation Being legally
- 02:58
binding the broker's take a volume weighted average price called
- 03:01
a V wop And conveniently the price on this Tuesday
- 03:05
was exactly one hundred dollars and one cent So that's
- 03:08
the price at which the shares were donated and you
- 03:10
have a game then subtracting that any that it cost
- 03:13
you of exactly one hundred dollars for the pleasure of
- 03:16
making the donation Have you sold the shares and just
- 03:19
kept the proceeds personally Well you'd have shown a gain
- 03:22
of exactly one hundred dollars on which you'd be taxed
- 03:24
at long term gain race So like with Obama care
- 03:27
federal and state taxes in a blue state of about
- 03:30
third you tax about thirty five percent ish so that
- 03:34
per share you'd pay thirty five dollars in facts and
- 03:37
keep sixty five So in this case appreciated stock is
- 03:41
a bit less favorable from attacks perspective to donate versus
- 03:44
just donating cash that was delivered to you via your
- 03:47
paycheck or in some other ordinary income taxiway like bond
- 03:51
interest for moneys you loaned Well in the case of
- 03:55
the cash donation you would have kept four hundred fifty
- 03:58
grand after tax but in the case of a stock
- 04:00
donation you would've kept six hundred fifty grand So what
- 04:03
if you weren't the founder like you had just bought
- 04:06
the stock and say thirty dollars a share Waited a
- 04:08
few years and then decided you wanted to donate it
- 04:11
at one hundred bucks a share Well you'd show a
- 04:13
taxable gain of seventy dollars again at the one third
- 04:16
ish rate called thirty five percent So then your choices
- 04:19
Just donate a million dollars in appreciated stock never paying
- 04:22
tax on it or sell it and pay a thirty
- 04:24
five percent tax on the gain of seventy dollars or
- 04:27
attacks of about two hundred fifty grand keeping in this
- 04:30
case seven hundred fifty grand The less of a game
- 04:33
you have the less of attacks you are sheltering But
- 04:37
what if things go the other way like you paid
- 04:39
one hundred dollars for the stock and it then went
- 04:41
down like a lot toe forty bucks a share I've
- 04:43
been there done that Should you then give it away
- 04:46
No no and a half Because here the loss on
- 04:49
that investment is actually valuable to you on your own
- 04:52
From attacks perspective you may want to sell the stock
- 04:55
And if you do while you get to keep a
- 04:57
sixty dollars share loss which you can apply to offset
- 05:00
gains in another stock in which you made money like
- 05:04
you're sheltering your gains by realizing those losses Well in
- 05:08
this case giving it away doesn't help you with taxes
- 05:10
At all Give away a different stock where you've made
- 05:13
money and enjoy the ride Will this formula presumes that
- 05:16
you've held the stock an entire year In most cases
- 05:19
founders of companies have run them for years and years
- 05:22
or even decades before donating the charities But every now
- 05:25
and then someone visors stock for it Bucks a share
- 05:27
tohave it ten months later be trading it fifty and
- 05:29
the owner feels like it's on the precipice of disaster
- 05:32
and wants to just unload it fast So that would
- 05:35
get ordinary income treatment And they generally would unload it
- 05:39
real quickly on their favorite charity rather than pay all
- 05:41
that tax So yeah time to put that solid clown 00:05:44.267 --> [endTime] college training to use
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