Is it me or the whole point of charity giving strategy to reduce tax the stupidest idea in the whole?
I have $100 in capital gain, my tax rate is 50%, so instead of taking the after tax profit $50, I am going to give away all my $100.
That’s like using nuclear suicide method ?!
The CFA notes are not clear in this paragraph. I think what is missing in your reasoning is that the individual want to make the charity (it is an assumption), he will have a cash out in any case (it is like a cash out for buying an home). Under this assumtpion, the investor will have a 100 cash out and want to make the transfer in an efficient way: depending on the assumptions, he will transfer the 100 without paying gift taxes (meaning that if taxes were applicable the gross amount for him would be higher for an equivalent net transfer) and probably he will deduct the 100 from his tax bases (saving of 50)
This is my view, let’s wait the others
It’s a question of when to donate, not if to donate.
excellent point for cash donations. so never do cash.
what some people do is donate items and fib around the valuation.
this can range from your old clothes, sofa, all the way up to art worth millions of dollars.
there are also some people who work with art appraisers to drum up interest in the art they sold you to raise the valuation. some people buy up all the art from a specific artist, put 1 up for auction and actually bid up their own art themselves, then donate the higher valuation art they purchased.
in terms of averages, the fine art market goes up around 10% per year. but the insurance and storage fees youd pay, not to mention the appraisal, comission can easily eat up that rise.
there was this ubscrupulous billionaire dude. that created a “public” museum in his backyard. and donated all his art there. no one really visits it because he put a lot of restrictions.
in terms of the irs. people donate close to 300b, leading to a 44b loss annually for the irs…
but i think the biggest offenders though. create a foundation themselves and donate their money/appreciated stock there and have it run by their kids as passion projects that way it can grow without being taxed, but they still exercise full control. imo this is the best long con with highest cost to the american people.
Still tho, the whole point of tax efficiency is to minimum tax. The ultimate goal is to keep as much money to myself as possible. Giving my money away to a charity defeats the whole purpose and make me poorer than just not using any tax strategies and pay taxes.
The point is that the choice of whether to donate or not isn’t based on tax efficiency (in the CFA world, if not in the real world).
Again: in this case you have already decided to donate, that’s the main assumption. Starting form that, you should optimime the tax impact.
I would reformulate: The ultimate goal is to “keep as much money to myself (and to the charity) as possible”, given that you already decided to donate
say you bought 10 pieces of art at 1m a piece so 10m.
then you put 1 up for auction and bid it up to 10m. so now all your art is valued at 100m.
then you donate all your art to a museum and get a tax refund of 50m.
you just made a 400% gain!
In this case the tax refund of 50 will be equal to tha after tax gain of a sale (assuming 50% tax rate): that’ why, in my view that, the 100m donation is a fact, it is an assumption that he will have this cash out. They are only trying to do it in a tax efficient way.
In other terms:
In both situations the individual achieved the goal of a 100m donation to the charity, but in 2) he will pay only 50.
well in this instance you fibbed with the numbers. you bought all the art and drove the price of it to10m. then donated it as a package deal valued at 10m a piece.
i was unsure on how tax work. but it is either 50% of cost basis on art. of 30% of FMV as a tax deduction.
so in the previous instance itd be 30m tax deduction. assuming 50% tax rate, thats a 15m tax benefit. yea haha its a lot of scamming just for a 50% gain. doest seem practical to me.