December 2010: Quarterly Letter

Dear Clients and Friends,

Happy Holidays!  I hope this note finds you in good cheer.  Normally, I send this update shortly after the close of the quarter, in this case I would publish the Q4 update in early January.  However, since the topic of today's letter contains information on tax planning that may be helpful, I thought it would be advantageous to get the information out to you before the end of the (tax) year.  You might be quick to point out: this leaves me free to enjoy the holiday without needing to work on a quarterly update.  But I'm sticking with my tax year story.

I have been diligently following the debate on extending the Bush era tax cuts, since it has a bearing on Bootstrap clients.  During the debate, there were many critics and supporters of raising taxes for families making more than $250,000.  It struck me - if you are so inclined - that a great way to register your opinion would be: just give the money away. This thought led me to today's subject: charitable giving.

The Advantages of Charitable Giving
(Or: How to 'Stick It to the Man' and Benefit Your Favorite Cause)

Whatever your motivation: you want to deprive the government of funds, or you have a special cause that is close to your heart, or you feel a sense of gratitude around this time of year, charitable giving can be a very important part of your financial planning.  Here are some reasons to get you started:

#1 You Can Afford It
We'll get into some examples of how this can work in a moment, but first some data.  In the US, based on a 2007 report compiled by the Federal Reserve (the most currently reported information), if you have a total net worth over $908,000 you are in the top 10% of household wealth in the US.  If you have a total net worth over $372,000 you are in the top 25% of wealth in the country.  If you fall into either of those categories, you are likely in the top 5% of wealth in the world.

#2: It Doesn't Hurt as Much as You Think
Now we'll look at an example of how this works.  Suppose we have a couple that earns a combined income of $219,251 and lives in California.  This is $10,000 over the beginning of the 33% tax bracket of $209,251.  Rather than keep the last $10,000 they earn, they elect to donate it to their favorite qualified charity.  In this case, their $10,000 tax deduction means that they avoid paying $3,300 in Federal taxes on this money.  Additionally, they avoid paying California state taxes - currently 9.3% or $930.  So their favorite charity gets the full $10,000 and our fictitious couple has their after tax income reduced by only $5,770 ($10,000 - $3,300 - $930).  That's a lot of additional bang for your buck.

#3 Super Charge Your Gift
Not enough incentive for you?  Let's also consider this favorite technique of really advanced givers.  Instead of donating cash, you can donate appreciated securities.  Suppose our fictitious couple is also a Bootstrap client (shameless plug) and is sitting on $10,000 of securities that have doubled in value, i.e. they were originally purchased for $5,000.  If they donate the securities instead of cash, they also avoiding paying 15% capital gains tax on the proceeds of their investment.  And yes, the full $10,000 is still deductible on your taxes.  In this case, there is an additional $750 in tax savings ($5,000 capital gain X 15%), making the reduction to income only $5,020!

#4 But Wait - There's More!
Still not convinced?  Well, some of you may even be able to take advantage of a corporate matching program.  If your company offers this, it can really boost the impact of your gift.  Some companies match charitable gifts dollar for dollar (to certain limits).  So when you add it all up - if you can participate in a corporate match - you can leverage $5,020 of income reduction for a gift of $20,000 to your favorite charity.  Happy Holidays indeed!

In Closing

As you consider donating to a non-profit organization, do a little research to ensure that the organization uses your hard earned money effectively.  I have found two good on-line resources to help investigate charities: charitynavigator.org and greatnonprofits.org.  These sites should give you an overview of how well the charity is performing it's published function.

If you have any friends or family with questions about charitable giving or any other financial issue, please don't hesitate to make an introduction or forward this letter.  We provide Financial Planning and Investment Management services and would be happy to talk with your acquaintances.  We will treat your friends and family with the same care and diligence that we treat you.

I'd like to thank all of you for your support and encouragement in 2010!  Bootstrap Capital had a successful year and I look forward to working with you all in 2011.  I'd like to wish you and your families a Happy Holiday and joyous New Year!

Thanks,

Brian McCann