Finance: What is a Charitable Contribution Deduction?

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Transcript

00:25

you work at a bank an investment bank which pays

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you five million dollars a year for the pleasure of

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your company or rather the pleasure of your big brain

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

00:38

percent commissions to the bank when you sell them to

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Google or Amazon or Facebook for five billion dollars You

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know companies and clients like that you attract him so

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

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Well schooling helped you loved attending clown college for bankers

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and now you want to donate a million dollars to

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

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ties and oversized wing tips for the current students there

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So how does your charitable contribution to clown college for

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bankers then work as faras Your taxes go Well normally

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

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something like fifty fifty five percent That is on the

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last million of earnings from your bank You keep it

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and give you take four hundred fifty grand but instead

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

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million So then what happens to the taxes on that

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

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you never earned that million dollars You get taxed on

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earnings of four million box instead of five And mathematically

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

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four hundred fifty grand after taxes with five fifty going

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

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to donate a million to clown college for bankers instead

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So you donate a million instead of keeping four hundred

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fifty k Easy So then how does it work when

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

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whatever dot com and you have three hundred million dollars

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in appreciated stock you quote need unquote Only a fraction

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of that amount to live on like at the most

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A million bucks a year covers every material thing you

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ever wanted and you find it just to ghost toe

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overtly spend money in our oh so stressed out society

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You were born the daughter of a farmer in a

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school teacher and her cursed with self awareness such that

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

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the expensive part of town Just a shove it in

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

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and you want to donate a million dollarsworth Well your

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stock today trades for about a hundred bucks a share

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

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

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

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and the stock is bopping between ninety nine eighty seven

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

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donate ten thousand shares Well howto those shares then get

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priced well on the day of the donation Being legally

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

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a V wop And conveniently the price on this Tuesday

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

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the price at which the shares were donated and you

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have a game then subtracting that any that it cost

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you of exactly one hundred dollars for the pleasure of

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making the donation Have you sold the shares and just

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

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

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at long term gain race So like with Obama care

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federal and state taxes in a blue state of about

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third you tax about thirty five percent ish so that

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

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keep sixty five So in this case appreciated stock is

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a bit less favorable from attacks perspective to donate versus

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just donating cash that was delivered to you via your

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paycheck or in some other ordinary income taxiway like bond

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interest for moneys you loaned Well in the case of

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the cash donation you would have kept four hundred fifty

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grand after tax but in the case of a stock

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

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

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the stock and say thirty dollars a share Waited a

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few years and then decided you wanted to donate it

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

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taxable gain of seventy dollars again at the one third

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ish rate called thirty five percent So then your choices

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Just donate a million dollars in appreciated stock never paying

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tax on it or sell it and pay a thirty

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five percent tax on the gain of seventy dollars or

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attacks of about two hundred fifty grand keeping in this

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case seven hundred fifty grand The less of a game

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you have the less of attacks you are sheltering But

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what if things go the other way like you paid

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one hundred dollars for the stock and it then went

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

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been there done that Should you then give it away

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No no and a half Because here the loss on

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that investment is actually valuable to you on your own

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From attacks perspective you may want to sell the stock

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And if you do while you get to keep a

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sixty dollars share loss which you can apply to offset

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gains in another stock in which you made money like

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

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

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

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money and enjoy the ride Will this formula presumes that

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

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founders of companies have run them for years and years

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or even decades before donating the charities But every now

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and then someone visors stock for it Bucks a share

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tohave it ten months later be trading it fifty and

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

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and wants to just unload it fast So that would

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get ordinary income treatment And they generally would unload it

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real quickly on their favorite charity rather than pay all

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