Checkbook labeled donate

Planning to give to charities: should you consider a donor-advised fund?

It hasn’t been covered much, but charitable donation deductions were almost eliminated for the middle class in the tax “reforms”. You can only deduct your charitable contributions if you decide to itemize, and your allowable itemized deductions exceed $12,000 for a single and $24,000 for married filing jointly—and remember, all state and local taxes are capped at $10,000, no matter what your property tax is. If your mortgage interest is significant or your itemized deductions will exceed these caps, your charitable deductions will still be deductible. If not, nada.

There’s one exception. For the 2020 tax year, you can separately list up to $300/taxpayer as an “above the line” deduction, without itemizing. That’s not a fortune, but it’s something. But what if you give more, or plan to?

If your total allowable deductions exceed $12/24 K and you plan to itemize, then charitable donations will be deductible. Let’s say you pay $10,000 in property taxes, $14,000 for mortgage interest, and make a $10,000 charitable donation = $34,000 in itemized deductions.

But what if you’re married, with a paid off house, and your property tax is $10,000? Then you don’t get any deduction for the charitable donation, because you won’t itemize.  In this case, probably the simplest way to deduct charitable donations is to bunch them into years where your itemized deductions will exceed the standard deduction, even if that means you make the donation every other year. So, with $10,000 in property tax, and $20,000 ( 2 years’ worth of donations), you’ll have an itemized deduction of $30,000—but only $6,000 benefit over the standard $24,000 deduction. You’ll also have to park the yearly budgeted charitable amount in an account somewhere, and pay taxes on whatever the probably minimal earnings are.

Then there’s the donor-advised fund, available to set up at most of the big investment houses. When you establish this fund, you put in a large lump sum, for which you get a tax deduction in the year you contribute the money. Then, you can keep it invested (and hopefully growing) until you decide to distribute it. The investment house will gleefully set this up for you, AND charge you a yearly management fee of about .60% to park it in the investment(s) you select. For that, they’ll faun all over you and tell you what a good person you are. But this is another one of those instances where there’s money to be made off of you, so why not? Even better, they’ll work with your financial advisor, who will also charge you a fee. So just let me know, okay? (not!)

For the most part, it seems worthwhile to me to simply park your donations in your own investment account and avoid the .60% fee. You can always donate the appreciated investment and avoid capital gains taxes when you make the donation (if that’s a consideration). You’ll have to pay tax on any earnings (dividends, interest), but you can choose an investment with very low or no payouts of this kind. If this is a donation that you make pretty regularly, there probably won’t be that much in earnings anyway.

The one situation where I can see that a donor-advised fund makes sense is if you 1) receive a large, taxable payout in one year (as with a taxable executive compensation payout at retirement), 2) have charitable intent anyway, and 3) have sufficient taxable earnings in the same year that you can use the entire donation as a deduction. It’s not going to be a direct trade off—your deduction won’t reduce your taxes in the same amount, but you will get a break IF YOU INTENDED TO DONATE ANYWAY. Or maybe you think you’re a savvy enough investor that you can grow the money better and faster (over and above the management fee) than the charity’s endowment team can. Um.

Other than that, I think most charities would rather have the money now. Or every other year or three. In the meantime, you can always designate one of your investments or investment accounts as earmarked to be donated, keeping it invested until the year when you can itemize.

That’s the story as I see it. If anyone can point out other situations, I’d be happy to hear about them.

 

 

Pigs feeding

How you’re like Jeff Bezos

But maybe not in a good way. Every third Facebook post or so mentions that ole’ Jeff should give away his billions and that would fix everything. I used to hear this about the Catholic Church, but Bezos is become the new favorite target. Why shouldn’t he—after all, Bill Gates and Warren Buffett give away buckets.

Here’s where you come in. Do you have a nice house? Decent car? Relatively recent wardrobe? Stash of wine, beer, booze, weed? Most of us (reading a personal finance blog) can answer yes to at least some of those. So, let’s say you’re now out of work. Don’t know how that happened. Can you pay the bills with any of that? Write a check off your house (without refinancing)? Pay the utilities with a 24-pack of craft brew? Cash out your 401k with no penalty, no tax, and not losing the employer match? Just how much are you giving to charity?

Truthfully, I don’t know any insider details about Jeff Bezos’ money. But I do know the difference between assets and income. Assets are wealth, and add to your net worth, but they may or may not produce spending money for you.

You can be a little old lady in a paid-off $2 million dollar house (an asset), but be scraping by on Social Security (income) if you don’t have any other income-producing assets like bonds, dividend paying stocks, or stocks you can sell. You would have a high net worth but very little ability to spend.

As far as I can determine, post-divorce Bezos owns about 11% of Amazon’s $1.175 trillion, so we’re not feeling too sorry for him. He also owns the Washington Post and, my guess, one or two shares in other companies. However, like your wine collection, Bezos has to sell Amazon to get money out of that wealth, which he does. He can’t just dump them whenever he feels the need for a $100 billion or so in chump change, because an insider making huge sales is a pretty good way to tank the company. Amazon doesn’t pay any dividends (Microsoft does) so selling stock is his source of income from the company. Sure, they pay him $81k in salary (kind of a joke), but the rest comes from stock grants, some of which he apparently sells each quarter. The market expects those sales, so no big impact, but liquidating and giving away half his wealth would raise an eyebrow or 10,000 on Wall Street.

By the way, it’s somewhat the same with the Catholic Church—an awful lot of the wealth of the Church is in real estate, structures, art works and artifacts, etc. Many of these are not easily sold, although some (real estate) can produce income. Let’s say, for example, you have a grand piano and a house, you have the mini-version of assets that don’t produce income (unless sold). If it’s your mom’s Steinway or your kid’s harp, it might be very difficult for you to countenance turning that to cash.

Bill Gates and Warren Buffett have pledged to give away huge portions of their fortunes, but not all at once and mostly through their foundations. Bezos could certainly do the same, as well as vastly improve treatment of workers. But here’s something overlooked: a publicly traded company has a duty to maximize return to shareholders (of which you are probably one, if you have a 401k). A company is supposed to be run as frugally as possible in order to return the most to its investors.

Business practices can and do change when workers organize themselves in such a way that management must respond to their demands or lose even MORE money than that response would cost—and why most companies fight unionization tooth and nail, until strikes, vandalism, pilferage, etc. start costing more than meeting workers demands. It’s ridiculous to assume management will take care of you or is benevolent: when publicly traded, they have a duty to get you as cheaply as possible.

Another agent for change is government regulation—when those regulations impose costs of doing business that the company can’t evade, and that (hopefully) are imposed on all businesses in the industry evenly. Regulatory agencies such as OSHA, the Consumer Protection Bureau, FINRA, and the EEOC can and sometimes used to strike fear (and produce change) in the hearts of employers.

Finally, the way to get money out of the hands of the company (and CEO, and investors, which also means you if you invest in a 401k) is taxation. Sure, companies howl about this and saber rattle about going somewhere else (which can also be addressed by regulation), but western European corporations still seem able to operate even when taxed.

So if you think Jeff Bezos should be compelled to provide better working conditions, support health care, or re-distribute wealth to his workers and the society that enables his success, appealing to his personal good heart (I don’t know if he has one or not), or trying to shame him in public isn’t the way to go. Why should it be an option? Why should a very few people have the opportunity to amass that level of wealth, then be lauded as heroes if they’re magnanimous enough to give some fraction of it back to charities which mirror their own priorities?

What we should be advocating for is evenly applied government regulation, taxation, and strong partnerships with unionization. These actions might make a company less profitable in the short run, but provide for a healthier, better educated, more fairly treated workforce with a viable safety net not dependent on the largess, or lack thereof, of any smart rich person.

Tax stamp

Why your taxes went up

Many of us are still pondering why we didn’t benefit from the alleged tax cut and worrying about what will happen this year, again. After all, tax brackets went down 3-4% for the first 4 tax brackets. But (and this continues this year) your taxable income most likely went up. Don’t expect that to improve for 2019. At a recent conference I attended, this was much discussed. Why?

You live in a blue state. Clever how that worked, huh? Because in many blue states and urban areas, your property taxes on a middle-class home probably exceeded the $10K cap. Add in your state income tax paid. And don’t forget that mortgage interest you used to itemize. With just these three, there’s a good chance you could exceed the $24K standard deduction (married filing jointly) or $12,000 (single). These increase to $24,400/$12,200 for 2019. Woohoo. But once income tax and property tax are capped at $10K total, your mortgage interest might not put you over the standard deduction.

Your charitable deductions don’t count. If you don’t itemize, you don’t get to take a charitable deduction.

You can’t deduct employee expenses. If you buy supplies, or uniforms (except for teachers), that’s on your dime, now.

You don’t have kids. People with kids saw the tax credit doubled.

For 2019, your medical deductions might not qualify. For 2017 and 2018, you needed medical expenses  greater than 7.5% of your income. For 2019, it goes back up to 10% of adjusted gross.

Changes to alimony. Alimony is no longer deductible to the person who pays, beginning with divorces finalized in 2019. The recipient will no longer be taxed on the alimony, but this is likely to result in lower payments to the recipient (since the payer will be dinged for more).

There’s not a whole lot to be done, except by voting. However, it’s important to remember that lower taxes are not the only consideration—what you get for them is also important. It’s how much spendable income actually ends up in your pocket. If you didn’t have to pay for healthcare, long term care, could look forward to a decent guaranteed income in retirement, and didn’t have to save or pay for  college or vocational training, but had to pay, say, 5% higher taxes, you’d most likely be better off.  It’s the value you get, not just the taxes you pay. I discussed this quite extensively in this post, and what exactly we get compared to other Western Democracies here.