Pomp and Circumstance

6/17/2015

June is Graduation Season, and odds are good that you've spent some time seated on a cheap folding chair or arena bleacher watching someone proceed down an aisle in an overpriced cap and gown. Commencement speakers will thank the school faculty, staff, and all the parents who’ve made the opportunity for education possible. But chances are, they’ll forget to thank one surprisingly important group of people: the folks in Washington who drafted Internal Revenue Code Section 170(c). This particular code section incentivizes taxpayers to donate money to educational institutions for the benefit of a tax deduction – essentially allowing room for educational opportunities to grow while also offering significant benefits to those who are providing those opportunities!  

Take John Paulson, for example: Paulson is a hedge fund manager who owns a 28,500 square foot Manhattan townhouse, a $41.3 million Southampton estate, and a $49 million Aspen ranch. Back in 2007, he bet against the housing bubble and made close to $4 billion when everyone else was losing their shirt. Forbes magazine ranks him #113th-richest billionaire in the world, with a net worth of $11.2 billion. Several weeks ago, Paulson reached into his couch cushions and found $400 million he decided he didn't need. So, he gave that money to his alma mater, Harvard University. (Harvard has a $32.7 billion endowment, which means they don't need it either, but that's a different story.) Harvard will use the money to expand their engineering school and rename it in Paulson's honor. And here's where that tax code section 170(c) comes in: it lets Paulson deduct the gift from his 2015 tax return and save $100 million or so in taxes.  

Paulson isn't the only rich guy to donate millions of dollars to see his name on the wall of a building. Last month, another Wall Streeter named Steven Schwartzman ($12 billion net worth), found $150 million in the spare change jar on his bedroom dresser. He proceeded to donate that money to his alma mater, Yale University ($23.9 billion endowment), where the funds will be used to transform the Commons building into a performing arts center. (If you guessed that Yale is renaming it "the Schwartzman Center," give yourself 10 points. And if you said "Wow, Schwartzman's gift will save him $40 million or so in taxes," then give yourself another 10!)  

However, Wall Streeters aren't the only ones getting in on the action. Back in March, a California venture capitalist named Mark Stevens ($1.6 billion net worth), found $50 million in the back pocket of his favorite pair of blue jeans. Stevens eagerly turned that money over to his alma mater, the University of Southern California ($4.6 billion endowment), so that their institution could build a biology lab. If you guessed it'll be called the "Mark and Mary Steven Neuroimaging and Informatics Institute," you probably know a lot more about biology than we do. And while we can't know exactly how much the gift will amputate from the Stevens's taxes, we can be sure that it's going to be a lot.  

While we're having fun here with the amounts these guys are free to give, we're certainly not making fun of their tax breaks. Those breaks are what allow any American — whether that be John Paulson or your next-door neighbor — to be able to donate money to the school of their choice and pay a lower percentage of tax as a result. Americans as a group give nearly $40 billion per year to educational causes. And the tax breaks that encourage that generosity really do help make it possible for you to enjoy those graduation speeches you sat through earlier this month.  

But, you know what else guys like John Paulson, Steven Schwartman, and Mark Stevens also have? Tax plans. They know they can't just wait until April 15 to figure out how much they owe — at least not if they want to give buildings to universities. Shouldn't you take a page from their success and get a plan of your own?