It’s #GivingTuesday which means you might have been inspired to make a donation to a charitable organization. I’m betting, however, that your donations didn’t come anywhere close to the impressive $45 billion (give or take a few million) pledged to charitable causes today by Mark Zuckerberg, co-founder and chief executive officer (CEO) of Facebook.
Zuckerberg and his wife, Dr. Priscilla Chan, made the announcement via a letter to their daughter, Max. The letter was, of course, published on Facebook.
In the letter to Max, Zuckerberg and Chan, offered up poignantly:
Like all parents, we want you to grow up in a world better than ours today.
The letter went on to say that “[w]e will do our part to make this happen, not only because we love you, but also because we have a moral responsibility to all children in the next generation.”
To do these things, Zuckerberg and Chan promised:
We will give 99% of our Facebook shares — currently about $45 billion — during our lives to advance this mission. We know this is a small contribution compared to all the resources and talents of those already working on these issues. But we want to do what we can, working alongside many others.
They promised to share more details in the coming months.
However, they did note that they would “begin the Chan Zuckerberg Initiative to join people across the world to advance human potential and promote equality for all children in the next generation.” The initial areas of focus will be personalized learning, curing disease, connecting people and building strong communities – all issues that Zuckerberg and Chan addressed in the letter.
It’s not the first high-profile donation for Zuckerberg and Chan who have made news before with contributions to schools and EducationSuperhighway, a nonprofit organization which states that its mission is to “[u]pgrade the Internet access in every public school classroom in America so that every student has the opportunity to take advantage of the promise of digital learning.”
Those donations haven’t been a problem for the couple. Forbes currently ranks Zuckerberg at #1 in its list of America’s Richest Entrepreneurs Under 40 with a net worth of $46.8 billion. He ranks #16 in the list of Billionaires and #7 on the Forbes 400.
Zuckerberg and Chan indicated that the donation would be paid out over time. A donation of that size would normally cause deduction problems for taxpayers like you and me – even if stretched out over a number of years. The amount that you can deduct for charitable contributions in any tax year cannot be more than 50% of your adjusted gross income (AGI). That $1 billion or so – assuming a 45-year payout – is a bit more than 50% of my AGI. It could also be more than Zuckerberg’s (depending on salary, the market, and other investments) which means that his ability to claim a deduction could be limited.
That 50% limitation isn’t the only hurdle that high-income taxpayers face when it comes to charitable donations. For taxpayers who itemize their deductions, the Pease limitations, named after former Rep. Don Pease (D-OH), cap or phase out certain deductions for high-income taxpayers. The Pease thresholds kick in at $309,900 for married taxpayers in 2015 which likely puts our billionaire couple over the limit. After the limit, available itemized deductions are typically reduced by the lesser of 3% of AGI above the applicable threshold or 80% of the amount of itemized deductions.
(For more on those 2015 rates, including those Pease limitations, click here. For more on 2016 tax rates, click here.)
Pease limitations apply to charitable donations, the home mortgage interest deduction, state and local tax deductions and miscellaneous itemized deductions. They do not apply to medical expenses, investment expenses, gambling losses and certain theft and casualty losses. Other limits can also apply to charitable deductions, depending on the organization and the nature of the assets – such as capital gains property.
Yes, I just made a reference to capital gains property. That’s the real tax savings here – not simply the charitable deduction. Donating appreciated assets to charity is a good thing because you avoid paying capital gains tax.
Here’s how it works. Let’s say you want to donate $1,000 of stock to charity. Let’s assume that you paid $100 for the stock. If you sell the stock before you donate it, you have $1,000 in hand but you owe capital gains tax on the $900 profit: selling price of $1,000 less $100 of basis (more on basis here). If you assume a 20% capital gains tax rate, that’s $180 in tax that you have to hand over to Uncle Sam (remember that capital gains rates can vary depending on your income level). If you donate the after-tax gains to charity, the charity gets $820 and you get a charitable deduction of $820.
But what if you donated the $1,000 of appreciated stock directly to charity? You’d pay no capital gains tax and you’d get the benefit of a charitable deduction worth $1,000. The charity would sell the stock for $1,000 and pay no capital gains tax (remember, they’re tax-exempt) so they would keep the entire $1,000. It’s a win-win.
Now imagine that scenario with $45 billion of appreciated stock. It boggles the mind, right? The potential capital gains tax savings alone is huge.
That scenario works for all taxpayers with appreciated assets: you don’t have to have Facebook-like numbers to make it work.
So what can you learn from Mark Zuckerberg? One, you don’t always have to graduate from college to become a billionaire. Two, having a child completely changes your perspective on everything. And finally, making a charitable donation is not only a chance to make a difference: it’s also an excellent way to reduce your tax burden for the year – even when you’re a billionaire.
If you’re inspired by the Zuckerbergs and want to make a charitable donation, consider doing it today. You’ve still got a few more hours left. Last year, #GivingTuesday generated $46 million in donations.