5 ms·

The classic billionaire tax move. Donate money to your own foundation to work on things you want while getting a big tax break.

ceejayoz 4y ago
Donating $5.7B to save an absolute max (37% tax bracket; he's probably much lower with most income via capital gains) of about $2.1B in taxes doesn't make financial sense, unless you've got a plan to siphon off at least $3.6B tax-free out of the charity. Why do people think a $1B donation saves $1B in tax?
- Quarrelsome 4y ago
  it only doesn't make sense if you plan to individually spend that money on yourself. However once you have billions of dollars it becomes relatively difficult to spend that much on yourself. Therefore it becomes a place to spend money enacting the change on society that you want to see.
  - ceejayoz 4y ago
    Sure, but that's a different motivation entirely.
- ClumsyPilot 4y ago
  That money doesnt dissapear - it is still avaliable for lobbying, hiring staff and doing many other things.
  - illegalmemory 4y ago
    Or funding research projects that will benefit you indirectly
- bena 4y ago
  Yes, but the charity can pay for things for him. He needs to go to Europe and do "charity business", the charity can charter a jet for him, pay for his expenses, etc. Even better if he owns the jet, then he can essentially charter his own jet and have the charity cover the fuel and maintenance for that trip. That $5.7B is still effectively his, untaxed.
- Schweigi 4y ago
  He doesn’t need to shiphon anything. All the “donated” money is still in his control. In order to be effective at tax deference you need to separate the concept of who ownes the money and who controls it. As long as you still control it, it doesn’t matter who ownes it. That’s why a donner advised funds and similar concepts are used to reduce taxes or defer them. In addition it’s also great for asset protection. For example if he gave a personal guarantee on some of the Twitter debt, then moving money into the foundation (as long as his Twitter stint was not fraud) will remove that out of his name and make it untouchable to the banks. He can now use those funds to support trips to Mars and other projects. For those projects the charity might pay his expenses - for example a flight to attend a meeting in Hawaii. He can even use the money to hire his kids. The kids would have a much lower (w2) tax rate so effectively he reduced tax but kept the money in the family.
  - mindslight 4y ago
    Exactly. It's not some hack that magically makes income tax liability just disappear, as many commenters are thinking it could be. Rather there are marginal tax benefits combined with strong asset protection, that make sense when you've got an obscene amount of money to manage so the administrative overhead becomes negligible - the question goes from "why" to "why not". Another thing people are missing is that it's not an income tax dodge, but rather an estate tax dodge. The money will remain in control of his heirs, assuring they'll never go hungry or want for a place in the world. It also creates more opportunities to play with asset valuations to evade taxes (eg separate the financial and voting interest of some stock in a closely held company, then claim the financial interest is worth very little without the control interest). But it's impossible to know if this is actually being done without seeing tax filings, including his (eventual) estate tax filing.
- yamtaddle 4y ago
  > Why do people think a $1B donation saves $1B in tax? A distressingly large slice of eligible voters don't even understand how marginal tax rates work. Which is, like, the absolute minimum to have any clue whatsoever how US income taxes are applied, what tax bills will actually do if they become law, and so on. I'd be surprised if understanding of how deductions work is any more widespread. [EDIT] Not a great source, but it's in-line with the results I've seen from better ones in the past: https://today.yougov.com/topics/politics/articles-reports/2013/01/08/understanding-how-marginal-taxes-work-its-all-part https://today.yougov.com/topics/politics/articles-reports/20... Roughly half don't understand how marginal tax rates work. Can't find data on how many US adults understand how deductions work, but I doubt it's better.
  - yamtaddle 4y ago
    Can't edit anymore: not mad about the downvotes, but I also don't understand them, at all. What about this rubbed people the wrong way? The answer to the question is that lots and lots of people don't understand how income taxes work, even a little. So many that one may expect to regularly encounter such people. I'll grant the results are from the social science side of things, which HN doesn't much care for, but that's just... where the answers to that question happen to come from.
  - mrep 4y ago
    > Can't find data on how many US adults understand how deductions work, but I doubt it's better. Almost certainly much much lower seeing as how a ton of people here don't understand how deductions work.
- bzjlvewivezw 4y ago
  It is possible to donate appreciated stocks. And the tax rate can be higher than 37%, if it's short-term gains in California since there's state tax as well. To run the numbers on the 37%: Charity: 5.7B deduction * 0.37 rate = 2.109B value of the tax deduction Selling: 5.7B deduction * (1-0.37) = 3.5B value of the stock sale In addition, the shares were at an inflated value - if he dumps 5.7B onto the market, it's going to drop the value of the remaining 100B of shares. Whereas by donating to the charity, you get the 5.7B deduction, and the fund you donated to does not even have to sell the stock. Even if the stock drops shortly after, such as in this case, he still gets to keep the large deduction. See https://dlj.law.duke.edu/article/insider-giving-avci-vol71-iss3/ https://dlj.law.duke.edu/article/insider-giving-avci-vol71-i..., illegal but unenforced. Also, he can use the charity money anyway to pay for various things he feels like spending money on - other billionaires have used personal charities to settle lawsuits, employ their children / cousins, invest in businesses of friends, etc.
onlyrealcuzzo 4y ago
How does the tax break work? Don't you still have to pay income and/or capital gains tax on everything that goes into the fund minus a pretty small amount?
- stanleydrew 4y ago
  I don't have experience donating to a charity that I created, so rules may be different, but in general no you don't pay any tax on donated in-kind securities and the amount of the deduction you take is generally the market value of the securities on the day they were transferred.
- brookst 4y ago
  Let’s say I make $100 at an effective income tax rate of 35%. I pay $35 in taxes and keep $65. Now say I make the same $100 but I give $20 to a qualifying nonprofit. I have $80 left, on which I pay 35% ($28), leaving me with $52. I have $13 less than I would have without the contribution. But if I own the nonprofit, funds under my control go from $65 to $72.
  - s1artibartfast 4y ago
    The important distinction is that you cant spend those non-profit funds the same way you could cash in your pocket. It is under your control, but you can't use it to buy a Hawaiian island vacation home.
    - yardie 4y ago
      You can absolutely borrow money from the charity. I worked at a non-profit and high-value donors would donate without actually needing to send money. It was all paperwork. The charity only really was paid when the donor died.
    - brookst 4y ago
      Well, sort of. I can use it to buy a Hawaiian compound and retreat that my nonprofit will use, and it might have living space and my taste in art on the walls, and the people invited for conferences might be my friends. At that point it comes down to regulators’ appetite and ability to enforce, and of course the worst cast is some fines. As long as the EV of fines for inappropriate spending that is caught is less than the tax savings from both caught and uncaught abuses, I’m still ahead. But really I don’t think the abuses are that overt anyway; Elon can buy his own Hawaii property. These things are usually more funds to hire friends and family and engage in political/social spending at lower effective costs.
twodave 4y ago
I'm not sure I see the big problem here. Our government has decided that if you want to dedicate your resources to an approved cause that it won't hinder that cause by taxing those contributed resources. We don't place limitations on who is allowed to run a charity, and the range of valid exempt purposes[0] leaves a lot of potential for those resources to be used. Just because someone is a billionaire or not shouldn't determine whether their charitable contributions are self-serving or not. Millions of people donate to their churches on a weekly basis and directly benefit from those contributions as well. [0] https://www.irs.gov/charities-non-profits/charitable-organizations/exempt-purposes-internal-revenue-code-section-501c3 https://www.irs.gov/charities-non-profits/charitable-organiz...
- makeitdouble 4y ago
  Parent's point is probably that their government should change opinion on the matter and tax contributions to your own organizations. Musk's behavior being currently legal or incentifized is kinda beyond the point.
  - twodave 4y ago
    I'm aware of that. I'm adding on that just because Musk has a lot of money shouldn't have anything to do with the laws. In my opinion, if he's not allowed to benefit indirectly from his charitable contributions then neither should the average churchgoer.
    - makeitdouble 4y ago
      “rules are different for you because you have a lot of money” is a concept we can’t get rid of. Trying to make it irrelevant is exactly why people throw money at ethical issues and socially disruptive behaviors, and get away with it unscathed. When street parking laws have nothing to do with wether you’re rich or not, that becomes an issue. Charitable contributions having nothing to do with it is (to me) an issue. TBH I’m atheist, so my sympathy for churgoer tax breaks is limited, but I’d argue donation to orgs that benefit yourself shouldn’t be tax free in general. To take a silly example: if my street looked like a garbage slum and I made a non profit to make it look gorgeous, while there might be wider communal impacts, it’s something I and the street residents should have been doing anyway, and with no tax break involved.
Vaslo 4y ago
I would do the same thing if I had the money to do it. So would you. Why waste it on government?
abledon 4y ago
did you watch Chappelle's segment on how trump walks out of the house, says what hes doing, then walks right back in?

ceejayoz 4y ago

Donating $5.7B to save an absolute max (37% tax bracket; he's probably much lower with most income via capital gains) of about $2.1B in taxes doesn't make financial sense, unless you've got a plan to siphon off at least $3.6B tax-free out of the charity. Why do people think a $1B donation saves $1B in tax?

Quarrelsome 4y ago
it only doesn't make sense if you plan to individually spend that money on yourself. However once you have billions of dollars it becomes relatively difficult to spend that much on yourself. Therefore it becomes a place to spend money enacting the change on society that you want to see.
- ceejayoz 4y ago
  Sure, but that's a different motivation entirely.
ClumsyPilot 4y ago
That money doesnt dissapear - it is still avaliable for lobbying, hiring staff and doing many other things.
- illegalmemory 4y ago
  Or funding research projects that will benefit you indirectly
bena 4y ago
Yes, but the charity can pay for things for him. He needs to go to Europe and do "charity business", the charity can charter a jet for him, pay for his expenses, etc. Even better if he owns the jet, then he can essentially charter his own jet and have the charity cover the fuel and maintenance for that trip. That $5.7B is still effectively his, untaxed.
Schweigi 4y ago
He doesn’t need to shiphon anything. All the “donated” money is still in his control. In order to be effective at tax deference you need to separate the concept of who ownes the money and who controls it. As long as you still control it, it doesn’t matter who ownes it. That’s why a donner advised funds and similar concepts are used to reduce taxes or defer them. In addition it’s also great for asset protection. For example if he gave a personal guarantee on some of the Twitter debt, then moving money into the foundation (as long as his Twitter stint was not fraud) will remove that out of his name and make it untouchable to the banks. He can now use those funds to support trips to Mars and other projects. For those projects the charity might pay his expenses - for example a flight to attend a meeting in Hawaii. He can even use the money to hire his kids. The kids would have a much lower (w2) tax rate so effectively he reduced tax but kept the money in the family.
- mindslight 4y ago
  Exactly. It's not some hack that magically makes income tax liability just disappear, as many commenters are thinking it could be. Rather there are marginal tax benefits combined with strong asset protection, that make sense when you've got an obscene amount of money to manage so the administrative overhead becomes negligible - the question goes from "why" to "why not". Another thing people are missing is that it's not an income tax dodge, but rather an estate tax dodge. The money will remain in control of his heirs, assuring they'll never go hungry or want for a place in the world. It also creates more opportunities to play with asset valuations to evade taxes (eg separate the financial and voting interest of some stock in a closely held company, then claim the financial interest is worth very little without the control interest). But it's impossible to know if this is actually being done without seeing tax filings, including his (eventual) estate tax filing.
yamtaddle 4y ago
> Why do people think a $1B donation saves $1B in tax? A distressingly large slice of eligible voters don't even understand how marginal tax rates work. Which is, like, the absolute minimum to have any clue whatsoever how US income taxes are applied, what tax bills will actually do if they become law, and so on. I'd be surprised if understanding of how deductions work is any more widespread. [EDIT] Not a great source, but it's in-line with the results I've seen from better ones in the past: https://today.yougov.com/topics/politics/articles-reports/2013/01/08/understanding-how-marginal-taxes-work-its-all-part https://today.yougov.com/topics/politics/articles-reports/20... Roughly half don't understand how marginal tax rates work. Can't find data on how many US adults understand how deductions work, but I doubt it's better.
- yamtaddle 4y ago
  Can't edit anymore: not mad about the downvotes, but I also don't understand them, at all. What about this rubbed people the wrong way? The answer to the question is that lots and lots of people don't understand how income taxes work, even a little. So many that one may expect to regularly encounter such people. I'll grant the results are from the social science side of things, which HN doesn't much care for, but that's just... where the answers to that question happen to come from.
- mrep 4y ago
  > Can't find data on how many US adults understand how deductions work, but I doubt it's better. Almost certainly much much lower seeing as how a ton of people here don't understand how deductions work.
bzjlvewivezw 4y ago
It is possible to donate appreciated stocks. And the tax rate can be higher than 37%, if it's short-term gains in California since there's state tax as well. To run the numbers on the 37%: Charity: 5.7B deduction * 0.37 rate = 2.109B value of the tax deduction Selling: 5.7B deduction * (1-0.37) = 3.5B value of the stock sale In addition, the shares were at an inflated value - if he dumps 5.7B onto the market, it's going to drop the value of the remaining 100B of shares. Whereas by donating to the charity, you get the 5.7B deduction, and the fund you donated to does not even have to sell the stock. Even if the stock drops shortly after, such as in this case, he still gets to keep the large deduction. See https://dlj.law.duke.edu/article/insider-giving-avci-vol71-iss3/ https://dlj.law.duke.edu/article/insider-giving-avci-vol71-i..., illegal but unenforced. Also, he can use the charity money anyway to pay for various things he feels like spending money on - other billionaires have used personal charities to settle lawsuits, employ their children / cousins, invest in businesses of friends, etc.

onlyrealcuzzo 4y ago

How does the tax break work? Don't you still have to pay income and/or capital gains tax on everything that goes into the fund minus a pretty small amount?

stanleydrew 4y ago
I don't have experience donating to a charity that I created, so rules may be different, but in general no you don't pay any tax on donated in-kind securities and the amount of the deduction you take is generally the market value of the securities on the day they were transferred.
brookst 4y ago
Let’s say I make $100 at an effective income tax rate of 35%. I pay $35 in taxes and keep $65. Now say I make the same $100 but I give $20 to a qualifying nonprofit. I have $80 left, on which I pay 35% ($28), leaving me with $52. I have $13 less than I would have without the contribution. But if I own the nonprofit, funds under my control go from $65 to $72.
- s1artibartfast 4y ago
  The important distinction is that you cant spend those non-profit funds the same way you could cash in your pocket. It is under your control, but you can't use it to buy a Hawaiian island vacation home.
  - yardie 4y ago
    You can absolutely borrow money from the charity. I worked at a non-profit and high-value donors would donate without actually needing to send money. It was all paperwork. The charity only really was paid when the donor died.
  - brookst 4y ago
    Well, sort of. I can use it to buy a Hawaiian compound and retreat that my nonprofit will use, and it might have living space and my taste in art on the walls, and the people invited for conferences might be my friends. At that point it comes down to regulators’ appetite and ability to enforce, and of course the worst cast is some fines. As long as the EV of fines for inappropriate spending that is caught is less than the tax savings from both caught and uncaught abuses, I’m still ahead. But really I don’t think the abuses are that overt anyway; Elon can buy his own Hawaii property. These things are usually more funds to hire friends and family and engage in political/social spending at lower effective costs.

twodave 4y ago

I'm not sure I see the big problem here. Our government has decided that if you want to dedicate your resources to an approved cause that it won't hinder that cause by taxing those contributed resources. We don't place limitations on who is allowed to run a charity, and the range of valid exempt purposes[0] leaves a lot of potential for those resources to be used. Just because someone is a billionaire or not shouldn't determine whether their charitable contributions are self-serving or not. Millions of people donate to their churches on a weekly basis and directly benefit from those contributions as well. [0] https://www.irs.gov/charities-non-profits/charitable-organizations/exempt-purposes-internal-revenue-code-section-501c3 https://www.irs.gov/charities-non-profits/charitable-organiz...

makeitdouble 4y ago
Parent's point is probably that their government should change opinion on the matter and tax contributions to your own organizations. Musk's behavior being currently legal or incentifized is kinda beyond the point.
- twodave 4y ago
  I'm aware of that. I'm adding on that just because Musk has a lot of money shouldn't have anything to do with the laws. In my opinion, if he's not allowed to benefit indirectly from his charitable contributions then neither should the average churchgoer.
  - makeitdouble 4y ago
    “rules are different for you because you have a lot of money” is a concept we can’t get rid of. Trying to make it irrelevant is exactly why people throw money at ethical issues and socially disruptive behaviors, and get away with it unscathed. When street parking laws have nothing to do with wether you’re rich or not, that becomes an issue. Charitable contributions having nothing to do with it is (to me) an issue. TBH I’m atheist, so my sympathy for churgoer tax breaks is limited, but I’d argue donation to orgs that benefit yourself shouldn’t be tax free in general. To take a silly example: if my street looked like a garbage slum and I made a non profit to make it look gorgeous, while there might be wider communal impacts, it’s something I and the street residents should have been doing anyway, and with no tax break involved.

Vaslo 4y ago

I would do the same thing if I had the money to do it. So would you. Why waste it on government?

abledon 4y ago

did you watch Chappelle's segment on how trump walks out of the house, says what hes doing, then walks right back in?