The following is a guest post from Marotta Asset Management.
As a response to the recent market correction, you can enrich your life in three healthy ways: Cut back your spending, increase your savings, and give more generously to charities of your choice.
The first two recommendations are obvious. If your retirement account is down, reducing your spending and increasing your savings are the best ways to get it back on track. If you are still appreciating assets, this strategy will help you meet your retirement goals. And if you are retired, it will help you stay within your safe spending rates. Even trimming your expenditures by $100 a month during retirement can add an extra quarter of a million dollars to your estate over a 30-year retirement.
But just as critical during an economic downturn is increasing your charitable giving.
Charities are hit especially hard during rough economic times. They face reduced giving and often greater needs. They must find supporters who give more in order to offset those who give less.
Charity freely given is a virtue distinctly more valuable than any government program could be. For charity to be a virtue, it must be freely given. But government entitlement programs are funded from taxes. When you pay your taxes, it is no more virtuous if they are used to buy cruise missiles than to fund school lunch programs. The only virtue here is meeting your legal obligations.
Taxes are not freely given. They are coerced through the threat of imprisonment. Taxes are an obligation and a duty, not a virtue. Charitable begins only after you meet the financial obligation of paying your taxes.
The virtue of charity is an important one to understand and appreciate. True virtue and morality cannot be legislated. Government cannot make people virtuous; it can only make certain actions illegal. Coerced charity ceases to be charity. Politicians from both parties need to understand this principle.
Furthermore, only when you give of your resources is it true charity. Government has no resources of its own. It can only take the production of others and redistribute it, which certainly is not charity.
Those who seek to be charitable must first produce more than they consume to have something to share. As much as it may make you feel good to support laws that take from the productive and give to others, it is not charity on your part. Voting to spend tax dollars isn't charity. Only individuals who give from their own resources can be charitable. Voting for government entitlement programs is like being generous with your neighbor's credit card.
But doing good while doing well is an American tradition. We are a nation of generous people who generally don't want to pay taxes.
No matter what worthy organizations you support, you can donate up to 15% more if you give them appreciated stock instead of cash. For example, if you sell $1,000 worth of appreciated stock, you must pay the capital gains tax of 15%. If most of the stock's value is appreciation, the tax approaches $150, leaving only $850 for charitable giving.
This is the usual time of year to gift investments with gains to reduce your taxes. But that assumes you still have holdings with significant appreciation. Because of the market downturn, fewer people have appreciated stock, and nonprofit organizations as a result are feeling the pinch.
Fortunately another tax-savings opportunity is available for the charitably minded. The bailout plan includes one add-on that actually extended a good idea, at least for another year.
If you are age 70 1/2 or older and taking the required minimum distribution from your IRA account, you can give to charity directly from your IRA. Your gift will count as your required distribution. The gift will count as a distribution, but it won't be considered taxable income.
Normally you would be obliged to take the distribution, increase your adjusted gross income (AGI), and then gift to charity as a charitable deduction. The difference may not be obvious, but it's there. Many calculations in the tax code are tied to your AGI. Increase your AGI and you increase your phaseouts and other additional taxes. Take $5,000 out of your IRA and give it to charity, and you owe a significant additional tax on your generosity.
This provision in the bailout allows you to gift directly from your IRA. Although you won't get a deduction, it doesn't matter because it won't count as AGI in the first place. But here's the downside: This provision was only passed recently, and thus you can only use it on distributions you haven't taken yet. For many people, that might only mean their December distribution, but others take their entire distribution at the end of the year.
The details are complex, so contact your tax professional or financial planner to make sure you are complying with the IRS rules. And give purposefully what you have decided to give, not grudgingly or under compulsion.
"Charity freely given is a virtue distinctly more valuable than any government program could be. For charity to be a virtue, it must be freely given. But government entitlement programs are funded from taxes."
There's no virtue in obeying the law? Who knew!
I live in a free country. If I and my fellow-citizens get together and elect a government which collects money from all of us for the good of all of us, my contributions darned well count as good acts. My taxes feed the hungry, clothe the naked, care for the aged and orphans...any of this sound familiar? Anyone?
Posted by: Sarah | November 15, 2008 at 01:09 PM
Sarah-
I guess you could say that your tax contributions count as good acts, but that's pretty weak.
There's virtue in obeying the law, but I don't think I could say with a straight face that I gave to charity by paying my taxes.
Posted by: spivey | November 15, 2008 at 03:57 PM
Cut back your spending?
Hmmm, my monthly income is $1000. I pay $650 to rent a room in a house with nine people, $110 in medical expenses, and $136 to a student loan garnishment.
Exactly what spending should I cut back?
Posted by: poor boomer | November 16, 2008 at 11:44 AM
Good article.
But I'm not sure why Marotta even went into the bit about government versus charity. It seems kinda irrelevant to the point to me. Charity stands on its own as a good deed. YOu don't need to argue that paying taxes is coerced to support the cause of charity. Just seems like irrelevant negativity towards government..
Jim
Posted by: Jim | November 16, 2008 at 01:59 PM
Poor Boomer said: "$650 to rent a room in a house with nine people" if you're paying $650 to renta room then you're probably in someplace like San Francisco or Manhattan. Sorry but you need to move to somewhere more affordable if your income is that low.
Jim
Posted by: Jim | November 16, 2008 at 02:01 PM
Poor Boomer, Actually tinking about it.. If your income is $1000 a month then you're likely eligible as a recepient for govt aid. I think you can probably qualify for food stamps or other programs. I don't know what your circumstances are but $1000 a month is on the border of the poverty line for 1 person.
JIm
Posted by: Jim | November 16, 2008 at 02:10 PM
I live in Portland, which isn't as expensive as SF or Manhattan, or even as Seattle. Two of the people own the house and rent rooms to the other seven (there are two couples). Is this a great business model or what? Oh, and they charge weekly which attracts poor people who don't have the $1000+ bucks to move into a monthly rental, which is how I wound up here in the first place.
I'd love to do it myself but I don't have the startup costs (e.g. to buy the house in the first place).
And I don't even live anywhere near a decent location; I am in the next-to-last subdivision on the edge of town, two blocks from the end of a bus line with poor service.
I do get $25 in food stamps.
Note that I am stuck and can't move to a better/cheaper place because I am perpetually broke and have no move-in money.
Posted by: poor boomer | November 16, 2008 at 03:10 PM
Sarah,
Very little of taxes go to the areas you mentioned. With that said, it is my belief that God looks at how we as individuals care for those mentioned. I have yet to see anything where it says to find someone else (or a government) to do it for you. Several passages clearly speak of direct involvement, such as James 1:27.
Posted by: JimL | November 16, 2008 at 04:07 PM
Poor Boomer,
I assume you mean Portland Oregon rather than Maine. $650 for a room in Portland seems excessive. I did a search on Craigslist for Portland and it looks like rooms typically go for $300-400: http://portland.craigslist.org/roo/
If you look around you can find something that doesn't demand 1st and last months. Maybe one of those folks would let you pay in weekly amounts?
Are you employed or retired? If you are not disabled then are you looking for work? $1000 a month means you're either on a fixed income like social security or disability or you're working part time on minimum wage.
If you can't work or find work then you could seek the aid of charitable organizations. Someone might be able to help you out short term to get you out of the situation of paying high rent like you are. Or check into further public assistance. Given your income level you may qualify for public housing assistance (section 8).
You may be in a difficult spot but there are solutions and people willing to help.
Jim
Posted by: Jim | November 17, 2008 at 06:48 PM
Sarah: Following the law is not a moral choice -- it's a coercion. Even if you have moral reasons for acting in accordance with the law, it doesn't change the fact that other people require you to comply with it (at the threat of fining you, throwing you into prison, or even death) regardless of your moral sensibilities.
And I find it hard to believe that anyone, even those who say they believe that the law should always be followed to a T, actually follow the law ALL the time. Have you ever driven with a headlight out? Or jaywalked? Or let a piece of paper fall to the ground, blowing away in the wind, and not bothered to chase it down? If you think these illegal actions are okay, then you admit that following the law is not a moral obligation, and the rest is just a matter of degree.
There are literally millions of local, state and federal laws, and it's almost impossible to live a single day without breaking at least one of them.
Posted by: Curtis | November 23, 2008 at 05:33 AM