4 ms·

Right, but the previous comment suggests that you can reduce your personal tax liability to zero while still having some personal money paid to you: "pulls out

by lsc 8y ago

Right, but the previous comment suggests that you can reduce your personal tax liability to zero while still having some personal money paid to you: "pulls out only enough in salary to meet their expenses, makes an equivalent donation to charity to offset all their "income", and then pays zero in taxes." and that's confusing, 'cause say I can live off $100K/yr. So I pay myself $140K (or whatever) and pay the taxes on that and I have $100K left to pay for groceries and rent or whatever. Sure, my company maybe donated a bunch of money to some nonprofit I liked, and that decreased the company's tax liability. Maybe my company even lost money after the donations, and maybe I get to carry those losses forward... but that's not going to impact the personal income taxes on those wages I pay myself, or personal capital gains tax on the dividends I pay myself. But that's a different thing from the tax liability on that $140K I took out to buy my groceries, and pay my rent. I'm not a tax person, though I have been in the situation of paying both corporate and personal taxes- all I can say is that you need a properly licensed tax person in that situation, even if your business makes less than a google engineer.

nostrademons 8y ago
No, I mean that you pay yourself $100K and then you make a donation of $100K of securities, real estate, etc. to a charity out of assets that you control. You can deduct the full amount of "in kind" transfers to charity, and you don't need to pay the capital gains tax on them. The value of your charitable donation gets subtracted from your AGI, so you really can get to zero task liability this way. Meanwhile, you reinvest the remaining profits of the business so that the total value of your assets goes up by more than the $100K you paid yourself + $100K you donated to charity.
- AnthonyMouse 8y ago
  > The value of your charitable donation gets subtracted from your AGI, so you really can get to zero task liability this way. Of course, that's how it's supposed to work, because the reason it's set up that way is that if people actually do that, they have to donate $100K to charity in order to reduce their taxes by about a third that amount. Assuming the charity has about equal effectiveness as the government in using the money to benefit society (note that this is not a high bar), allowing the deduction significantly increases the amount of money going to benefit society compared to if the deduction wasn't allowed and as a result the donation wasn't made. You can argue about whether one organization or another shouldn't be considered a charity, but that's a separate question as to whether charitable donations should be deductible in general.
  - nostrademons 8y ago
    I pass no judgment on whether this is a good thing, only that it's a thing. I can see the argument that maybe society would be better served by a bunch of independent charities that all take voluntary donations. I'm not sure everybody buys that, or that these are donations that wouldn't otherwise be made if there were no tax deduction.
    - AnthonyMouse 8y ago
      > I can see the argument that maybe society would be better served by a bunch of independent charities that all take voluntary donations. I'm not sure everybody buys that I think this is mostly just the argument about what should be considered a charity again. If people are donating money to the Foundation for the Preservation of High Housing Costs, that is almost certainly not better than what the government would have done with it (or, for that matter, than setting the money on fire and doing nothing), but then why should that be considered a charity? Meanwhile the idea that the Gates Foundation isn't making better use of a dollar than the mean government expenditure is pretty ridiculous. At that point the argument would have to be that you still need money for government services that wouldn't be provided by charities -- assuming that the roads being in disrepair wouldn't cause anyone to donate money to a road-improving charity (and that having one of those wouldn't, as is the case now, be proscribed by law). But that's only a problem if almost everyone prefers to give more of their money to charity than to give less of it to the government, otherwise there are still many people paying taxes to fund government services. And given the size of government revenues despite the existence of the charitable deduction, that is clearly not the problem. > or that these are donations that wouldn't otherwise be made if there were no tax deduction. It still works even if it goes the other way. If you were inclined donate $100K of your income regardless but it wasn't deductible then you'd have lost about a third of that to taxes (or more than half if you also take into account state and local taxes in California), leaving that much less for the charity.
- lsc 8y ago
  So, there's two possibilities here that I know of. 1. you are running this all as a sole proprietorship, with no separation of business and personal money. In that case? sort of. Your accounting is going to be complex as heck. if you have $100K of assets to donate, donating those assets can offset $100K of income. you are giving up an amount equal to what you are earning to avoid taxes, it's a lot like not paying yourself, and selling and living off of the assets you donated, except you avoid some of the extra taxes you would have paid on doing that. Also note, in this case, the stuff you have to pay FICA on is... complicated, and your charitable donations usually don't get you out of FICA (which if you are rich you don't care about, but we're talking about $125K/yr, and as you are paying employee and employer, thats 15% - without selling the company or without paying both corp income tax and personal capital gains for a dividend, it's hard to take money out of a company without paying FICA.) Note, this is pretty unusual for people who know what they are doing. This is how I started out, and it was a real mess to untangle. Most people compartmentalize their businesses into several entities, and not just for liability protection (though that is nice, too) - Accounting works much better when your money isn't just one big pool. 2. this is the common thing. your businesses are their own tax entities. You have a LLC (often several) for your real estate, an S corp for your consulting/speaking income, C corps for a lot of your other businesses: In that case? having a business entity I control that is taxed as a c corp donate a bunch of money is going to change taxation for that entity. Not for the personal money I pay myself.
  - nostrademons 8y ago
    Not securities owned by the C corp, securities of the C corp. This of course requires that there be a liquid market in its stock. But this thread is about wealthy people, after all.
- voidmain 8y ago
  Gifts to charity can only be deducted up to 50% of AGI. Gifts of appreciated assets only up to 30%. If you are giving to private foundations, the limits are even lower. It is possible to carry forward excess deductions for a limited time, but that doesn't really help in the long run. If you are trying to consistently reduce your AGI to zero this approach does not work.

by lsc 8y ago

nostrademons 8y ago

No, I mean that you pay yourself $100K and then you make a donation of $100K of securities, real estate, etc. to a charity out of assets that you control. You can deduct the full amount of "in kind" transfers to charity, and you don't need to pay the capital gains tax on them. The value of your charitable donation gets subtracted from your AGI, so you really can get to zero task liability this way. Meanwhile, you reinvest the remaining profits of the business so that the total value of your assets goes up by more than the $100K you paid yourself + $100K you donated to charity.

AnthonyMouse 8y ago
> The value of your charitable donation gets subtracted from your AGI, so you really can get to zero task liability this way. Of course, that's how it's supposed to work, because the reason it's set up that way is that if people actually do that, they have to donate $100K to charity in order to reduce their taxes by about a third that amount. Assuming the charity has about equal effectiveness as the government in using the money to benefit society (note that this is not a high bar), allowing the deduction significantly increases the amount of money going to benefit society compared to if the deduction wasn't allowed and as a result the donation wasn't made. You can argue about whether one organization or another shouldn't be considered a charity, but that's a separate question as to whether charitable donations should be deductible in general.
- nostrademons 8y ago
  I pass no judgment on whether this is a good thing, only that it's a thing. I can see the argument that maybe society would be better served by a bunch of independent charities that all take voluntary donations. I'm not sure everybody buys that, or that these are donations that wouldn't otherwise be made if there were no tax deduction.
  - AnthonyMouse 8y ago
    > I can see the argument that maybe society would be better served by a bunch of independent charities that all take voluntary donations. I'm not sure everybody buys that I think this is mostly just the argument about what should be considered a charity again. If people are donating money to the Foundation for the Preservation of High Housing Costs, that is almost certainly not better than what the government would have done with it (or, for that matter, than setting the money on fire and doing nothing), but then why should that be considered a charity? Meanwhile the idea that the Gates Foundation isn't making better use of a dollar than the mean government expenditure is pretty ridiculous. At that point the argument would have to be that you still need money for government services that wouldn't be provided by charities -- assuming that the roads being in disrepair wouldn't cause anyone to donate money to a road-improving charity (and that having one of those wouldn't, as is the case now, be proscribed by law). But that's only a problem if almost everyone prefers to give more of their money to charity than to give less of it to the government, otherwise there are still many people paying taxes to fund government services. And given the size of government revenues despite the existence of the charitable deduction, that is clearly not the problem. > or that these are donations that wouldn't otherwise be made if there were no tax deduction. It still works even if it goes the other way. If you were inclined donate $100K of your income regardless but it wasn't deductible then you'd have lost about a third of that to taxes (or more than half if you also take into account state and local taxes in California), leaving that much less for the charity.
lsc 8y ago
So, there's two possibilities here that I know of. 1. you are running this all as a sole proprietorship, with no separation of business and personal money. In that case? sort of. Your accounting is going to be complex as heck. if you have $100K of assets to donate, donating those assets can offset $100K of income. you are giving up an amount equal to what you are earning to avoid taxes, it's a lot like not paying yourself, and selling and living off of the assets you donated, except you avoid some of the extra taxes you would have paid on doing that. Also note, in this case, the stuff you have to pay FICA on is... complicated, and your charitable donations usually don't get you out of FICA (which if you are rich you don't care about, but we're talking about $125K/yr, and as you are paying employee and employer, thats 15% - without selling the company or without paying both corp income tax and personal capital gains for a dividend, it's hard to take money out of a company without paying FICA.) Note, this is pretty unusual for people who know what they are doing. This is how I started out, and it was a real mess to untangle. Most people compartmentalize their businesses into several entities, and not just for liability protection (though that is nice, too) - Accounting works much better when your money isn't just one big pool. 2. this is the common thing. your businesses are their own tax entities. You have a LLC (often several) for your real estate, an S corp for your consulting/speaking income, C corps for a lot of your other businesses: In that case? having a business entity I control that is taxed as a c corp donate a bunch of money is going to change taxation for that entity. Not for the personal money I pay myself.
- nostrademons 8y ago
  Not securities owned by the C corp, securities of the C corp. This of course requires that there be a liquid market in its stock. But this thread is about wealthy people, after all.
voidmain 8y ago
Gifts to charity can only be deducted up to 50% of AGI. Gifts of appreciated assets only up to 30%. If you are giving to private foundations, the limits are even lower. It is possible to carry forward excess deductions for a limited time, but that doesn't really help in the long run. If you are trying to consistently reduce your AGI to zero this approach does not work.