Jonathan Clements's Blog, page 411

My Space

I BOUGHT MY HOUSE in Silicon Valley by launching a Kickstarter campaign. Together, the team blew past our target and disrupted an entire industry—all while driving for Lyft (not Uber) and Airbnb-ing our couches, of course.

Just kidding.

First, what is a house in Silicon Valley? In the lauded land of garages-turned-unicorns, owning a house means any number of things: A wall, if one’s lucky. A floor. Perhaps a couch.

Not so for the wise who live elsewhere—like my Phoenix-based high school best friend. There, houses have four bedrooms, three baths and substantial yards, all for mortgage payments below a one-bedroom Silicon Valley apartment’s monthly rent. At least, those were the numbers she and I swapped, at the time she bought her home.

Step 1: Find the down payment. Kickstarter pipe dreams aside, I’d actually saved for a decade and got financial help from my parents. Grateful and excited, I pulled up the Redfin app.

Step 2: Locate a neighborhood. Whaaat? Turns out, I’d be living near the freeway. That, or train tracks were my way to go.

Step 3: Then, a house. Finding a condo actually wasn’t too hard, though that may be a product of knowing what I wanted: A condo with two bedrooms, one bath. Fingers crossed for a side yard. More accurately, it was driven by the limited number of options I could afford.

Step 4: Bid. I ended up lucking out when placing a bid. My real estate agent had been in the business for years and kindly pulled a personal favor during the process. That gave my name extra attention and good vibes. My thoughtful “Dear Owner” letter also didn’t hurt.

Step 5: Go into escrow. After we entered escrow, I discovered there was a leak in the roof, and we’d likely need to replace it in three-to-five years for a sizable sum. I considered withdrawing, but negotiated my purchase price down instead. Maybe I could now afford that couch.

Step 6: Close. I couldn’t believe it the day my condo closed. Selfie-time. Hashtag #gotthekeys.

Step 7: Remodel. Remodeling the ancient floor and kitchen after moving in has been quite an adventure. I now understand emotional homeowner decisions. Which may be why I still periodically….

Step 8: Go back to Airbnb. Since I moved in, the homeowners’ association has paid sizeable sums to replace our sewer pipes and extract underground tree roots. We’re still waiting to fork over for the roof. To keep up with the assessments, I Airbnb my place when I travel. And I’m not talking about just my couch.

Caitlin Roberson, author of 30 Ways to Happy , helps top tech executives change the world through business storytelling. Her previous blogs were Money Well-Wasted and  Self-Tithing . Caitlin obsessively lifts weights and attends hip-hop classes, so she can tithe in Napa, guilt-free. You can learn more about her at CaitlinRoberson.com  and follow her on Instagram @CRobRobber .

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This Week/Nov. 12-18

HAVE A FAMILY TALK ABOUT COLLEGE. How much financial help can you give your children? If they’ll need to shoulder part of the cost, tell them long before they start eyeing colleges. What career do your teenagers plan to pursue? If they’ll likely end up with a modest income, you should counsel against colleges that will require hefty student loans.

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Number One Number

IF THERE’S ONE NUMBER that drives our financial lives, it’s our fixed living costs. We’re talking here about regularly recurring expenses that are pretty much unavoidable, such as mortgage or rent, car payments, property taxes, utilities, insurance premiums and groceries.

Why are fixed living costs so important? There are five reasons. First, the lower our fixed living costs, the easier it is to save. I believe many Americans would love to save more, but simply can’t, because they’re boxed in by hefty monthly expenses. I advise keeping total fixed living costs to 50% or less of pretax income—and yet the typical American family spends that much just on their home and car.

Second, low fixed costs mean we need less income to retire in comfort. One rule of thumb says retirees should aim for 80% of their final salary. But if our fixed living costs are low, we might be able to retire comfortably with just 50% of our preretirement income.

That makes saving for retirement far less onerous, because we might only need a nest egg that’s half as big. Why half? Suppose Social Security benefits will replicate 20% of our final salary. To get to 50%, or 30 percentage points more than this 20%, we’d need a nest egg that’s half the size of the portfolio required to hit 80%, or 60 percentage points more. One way to slash fixed costs: Get our mortgage and other debts paid off before we quit the workforce, and perhaps also trade down to a smaller place.

Third, if we hold down our fixed costs, we can probably make do with a smaller emergency fund. After all, if we get laid off, we’ll need to draw less from savings every month to keep the household running.

Fourth, lower fixed monthly costs mean less stress. After paying each month’s fixed costs, we should be left with plenty of financial breathing room. Result: We’re less likely to be living paycheck to paycheck and worrying constantly about how to pay the bills.

Finally, lower fixed costs can translate into greater happiness. The spending that brings us the most pleasure tends to be discretionary spending—things like eating out, attending concerts and going on vacation. If we have lower fixed costs, we’ll have more money left over for the fun stuff.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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Life After Amazon

IN NOVEMBER 2015, I got a notice from Amazon advising me that its security had been breached by some clever hacker and that my password may have been compromised. I was locked out of my account and instructed to set a new password.

In typical mindless fashion, I immediately set out to do just that. But then my inner contrarian stepped up and shouted some questions. I love this guy, even though most everyone around me thinks he’s a truculent moron.

“How can this happen?” he asked indignantly.

You mean to tell me that a retailer this big has failed to secure my data? This sets the convenience needle back a bit. I am not a fan of filling in required fields for any reason, plus now I have another password to manage.

“Can you trust Amazon?” he bellowed.

Hmmmm. Probably. I suppose the retailer’s employees have taken mitigating action and contacted me in my own interest. But they are responsible for an undetermined risk to my data and I find that inexcusable.

Now for the big one: “What happens if you stop buying from Amazon?” he sneered.

You’re joking, right? I mean, everyone uses Amazon for everything. You really have to use them. They make everything better through convenience. Even toothpaste, some would say.

It’s now been more than 18 months since I last used my Amazon account. How has that affected my life? Read on at your own risk.

1. I am more thoughtful about my purchases. The whole Amazon business model is built around closing the gap between stimulus and response. Come to think of it, every modern financial convenience is intended to make it just a little easier to transfer the wealth of the proles to clever people in fancy offices.

That’s not a moral judgment, it’s just reality: You see a shiny object (metaphor for something that psychologically appeals to your lizard brain), you do an internet search and—bam!—there it is on Amazon for a low, low price. Without Amazon, I am much more intentional about my purchases.

2. Therefore, I spend less. If the item I’m interested in requires just a little work on my part, I am more likely to make a better financial decision about the purchase. This is contrary to the entire economic system and could lead to the end of civilization. Cool.

When we were a young, penurious couple, Donna and I took the advice of Larry Burkett, the founder of Christian Financial Concepts. We agreed that for any non-budgeted purchase we would get three prices and wait 30 days before pulling the trigger. Many times that spared us a poor purchase decision, as our knowledge grew and the reality of the outcome was given some soak time. I didn’t consider myself to be an undisciplined spender prior to Amazon, but the impact on my consumption-to-savings ratio has been measurable.

3. I have less stuff. Having lived in the same house for 23 years, I am a case study in accumulation. I came by this trait honestly, as my father was a product of the Depression and knew scarcity in a way I likely never will. But there is a cost in terms of tidiness. Combine that with hyper-consumption and life can seem a bit crowded. The mental health benefits of reduced clutter are well documented. Those minimalist freaks may be on to something.

4. I have more time. Once the endorphins of package opening have receded back to a lonely crevice of my formerly fecund brain, I still have to manage some object and the package in which it was delivered. The stuff I like to buy tends to need attention in terms of cleaning, sharpening, polishing, lubricating, painting, adjusting and improving, all involving further purchases from Amazon. Now, I spend less time trying to figure out how to store and manage items that I should never have bought in the first place.

5. I invest more. As an amateur investor, I’m always looking for new ways to generate passive income. This is a reliable path to financial freedom for the un-wealthy. If a day comes when I don’t love my job, I want the freedom to politely tell someone where to insert it. We are all some ratio of consumer-to-saver. Anything that improves the ratio increases the freedom factor.

6. I have more relationships with local merchants. Now that more of my buying is local, I meet more human resources related to my purchases. Having been a local merchant, I fully understand the value in these relationships from both sides of the counter. It makes for a more civil and better-connected community. This is abstract but highly relevant, now more than ever.

7. I use the library more. I read voraciously. It can be an expensive habit. Amazon does books like no one, and it’s very easy to have them delivered to my porch. Still, today, more library book selection is done from the comfort of home, downloading audio and e-books at little or no cost. I read some esoteric stuff, so occasionally I still need to purchase online. Just not from Amazon.

8. On balance, I pay more per individual item. I’m not tracking cost differential and so can’t quantify, but I assume this is true. Nonetheless, due to the overall reduced spending and other benefits listed here, I feel fine about this. You can’t expect good service from your local merchant if you chisel every last nickel out of every transaction.

9. I can be more generous. Generosity is important to me. I give more intentionally, and have created a separate financial account to allow me to respond to people in need on short notice through organizations that are financially accountable. Not only can I give more because I am spending less, but also I am more aware of how those gifts are helping the lives of people.

Overall impact? On balance, abandoning Amazon has improved my quality of life. My decision won’t change the unfortunate consumption trends in our culture, but it will reduce clutter in my little world, while increasing my knowledge and resourcefulness. It will also increase the comfort margin if I need to leave the workforce for any unforeseen reason. Anything that helps me sleep better has great value these days.

So, yes, there is life after Amazon. Try it risk-free for 30 days, with a money-back guarantee and free shipping. What have you got to lose?

Editor’s note: HumbleDollar is an Amazon marketing affiliate. If you’re not swayed by the above article and remain hell-bent on ruining your life with online shopping, you can support this site by clicking through to Amazon using this link.

When not paddling, biking or shooting, Phil Dawson provides technical services for a global auto manufacturer. He, his sweetheart Donna and their four extraordinary daughters live in and around Jarrettsville, Maryland. 

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Along Came Sheila

HAVING RECENTLY LOST SEVERAL PEOPLE, I was in a bit of a daze. Grief stopped me from doing some of the things that brought me incredible joy, like downhill skiing and whitewater kayaking.

Enter Sheila.

Being the Sweed I am, I fell in love with Sheila—my gently used Volvo AWD V60 sedan. My attraction to Volvos included family nostalgia, safety and longevity. The dealer was a friend of my aunt, so I was able to negotiate a very reasonable price, while offloading an old car I was unable to sell on my own.

Now, I had no excuse. Sheila took me up mountains, hauled my kayak plus gear, and handled like a dream with anything mother nature threw at us. She fostered a sense of confidence and independence I never would have expected from a car.

I no longer hesitated to take off on last-minute road trips or adventures, sometimes by myself and sometimes with others. Fearless and confident, Sheila provided a gateway to nature, increasing my health and happiness.

Sheila received impeccable care—regular spa days, proper nutrition, exercise and rest. Our companionship—nine years together and over 100,000 miles—was cut short by an accident. Volvos are incredibly safe. Thankfully, I wasn’t injured. Sheila, however, was totaled. My heart sank as she was hauled off. How was I ever going to replace her?

Luckily, I had somewhat of a reprieve in my new husband’s trusty 2006 Toyota 4Runner. As much as it hurt, it didn’t make sense to own two vehicles that were all-wheel drive or four-wheel drive. I began searching for a practical four door sedan I could drive for several years.

Test driving several vehicles helped to assess overall quality, fit and finish. Safety, reliability and total cost of ownership ranked high on my priorities. Coming out of the financial crisis, dealers were ripe with incentives and low interest rates. I was debt-free and had about $7,000 from insurance proceeds to use as a down payment.

Welcome Priscilla Rose.

Buying new was comparable in overall cost to buying a used model that was two years older, thanks to better financing terms, the negotiated price and the extended warranty. Priscilla Rose also came with a lower insurance rate, no miles and a clean slate, not to mention that new car smell. Given my previous relationship, I knew I would take excellent care of her for years to come.

I do reminisce about snow adventures, secret waterfalls and Sheila. If Priscilla Rose—a practical, well-equipped Honda Accord—facilitates more of these opportunities, then I consider her a success. As Einstein said best, “What counts can’t always be counted; what can be counted doesn’t always count.”

Anika Hedstrom’s previous blogs include Gold Dust and  Growing Up (Part IV) . Anika is a financial planner with  Vista Capital Partners  in Portland, Ore. Follow her on Twitter @AnikaHedstrom .

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This Week/Nov. 5-11

REASSESS YOUR EMERGENCY FUND. Experts often recommend keeping three-to-six months of living expenses as an emergency fund. Just left a secure job to strike out on your own? You should probably hold more cash. Just retired? Now that losing your job is no longer a risk, you might shrink your emergency fund—and perhaps shutter it entirely.

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November’s Newsletter

IF THE KEY TO SMART money management was financial education, we’d all be voracious savers and rational, tenacious long-term investors. The reality: We are neck-deep in articles and books devoted to personal finance—I have been a generous contributor to the flood—and yet there’s scant evidence we’ve become any more financially responsible.

In short, the problem isn’t education. Rather, it’s getting ourselves to act. That’s the topic I tackle in November’s newsletter. My firm belief: In the years ahead, we’ll spend a lot less time debating whether a 4% retirement withdrawal rate is sustainable or whether we should have 20% or 40% of our stock portfolios invested abroad—and a lot more time trying to figure out how to get Americans to improve their financial behavior.

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Getting Better

TO IMPROVE OUR BEHAVIOR, we first need to realize we’re on the wrong path and then figure out the right way forward. Often, this isn’t especially difficult. If we have no savings, obviously we need to sock away some money. If we’re overweight, we should cut back on the calories. If we’re out of shape, we need to hit the gym.

Instead, the real problem is getting ourselves to act.

The contemplative side of our brain is fully aware we ought to eat and spend less, while exercising more. But our hardwired instincts keep telling us there’s great pleasure to be had in relaxing, snacking and shopping—and, much of the time, our instincts win out and immediate gratification rules the day.

How can we bolster the contemplative side of our brain, so we have a fighting chance at improving our behavior? I’ve become fascinated by the topic. In particular, I’d highly recommend The Willpower Instinct by Stanford University lecturer Kelly McGonigal.

Here are some strategies we can use to improve not just our financial behavior, but also other areas where we’re coming up short:

Commit to change. The first step is to figure out how we want to change—and thereafter keep that long-term commitment at the forefront of our thinking. The more desirable we can make our long-term goals—by pondering how great we’ll look in a bathing suit or all the wonderful things we will do once we retire—the greater the likelihood that we’ll make the necessary short-term sacrifices.

Even then, it’s easy to slip. Because we behaved well yesterday, or simply because we’re feeling down and our willpower is at a low ebb, we might decide to reward ourselves with a shopping spree or a Big Mac. We tell ourselves we’ll behave better tomorrow, but tomorrow often brings no improvement.

How can we avoid this cycle of one step forward, one step back? In her book, McGonigal suggests thinking about how we’d feel if we behaved badly not just today, but every day for the next year. Polishing off a bottle of wine tonight might not seem so terrible. But if we ponder knocking off a bottle every night for the next year, it drives home how much cumulative damage we could potentially do—and maybe that’ll give us the willpower tonight to stop at a single glass.

This goes to the issue of mindset. Through college and for a few years after, I smoked. A few times, I tried to stop but failed—until I read an article that noted that most smokers have the attitude, “I don’t really want to quit, but I’ll try.” The article argued this was a recipe for failure, because it underscored our lack of commitment. Instead, we need to tell ourselves, “I want to quit” and mean it. I tried that approach—and it worked.

Hit the pause button. If we’re to thwart our instincts, we need to give the contemplative side of our brains a chance to weigh in. Got your eye on an expensive bauble? Instead of immediately pulling out the credit card, try walking away and pondering whether there are better uses for the money. Even a 10-minute cooling-off period can do the trick.

Reframe the choice. The classic example is the 401(k) plan. Many now require employees to opt out of participating, rather than requiring them to opt in. That makes contributing seem like the norm.

Cafeterias have also experimented with guiding people’s choices. For instance, smaller plates encourage less food consumption. Similarly, giving healthier items more prominence, more appetizing names and displaying them more attractively can influence our choices.

We tend to be loss averse, meaning we get far more pain from losses than pleasure from gains. We might use this insight to encourage ourselves to save. Let’s say we want to retire in 30 years with $1 million. Assuming a 4% real return, that would require us to sock away $1,436 per month. What if we put off saving for retirement for five years, so we save and invest for just 25 years? We’d lose $259,000 of our hoped-for million.

Automate it. Inertia can stop us from ever starting. But if we can overcome that initial inertia and establish automatic savings plans, inertia becomes our friend, because we’re unlikely to cancel these plans once they’re set up.

This is another advantage of 401(k) and 403(b) plans, which are funded by automatic deductions from employees’ paychecks. We can also take advantage of inertia by establishing automatic contributions to a savings account or a mutual fund, with the money pulled from our checking account every month.

Put it out of reach. Don’t want to eat chocolate? Don’t keep it in the house. Want to avoid impulse purchases? Leave the credit cards at home. Don’t want to spend your savings? Stash them in a retirement account, where any withdrawals will trigger income taxes and tax penalties.

Take baby steps. Training for a marathon is a daunting task, especially if we don’t run regularly. How about starting with something less ambitious, like the local 5k?

The same thinking applies to other areas of our lives: We shouldn’t try to do too much all at once. It seems we have a daily willpower budget. If we blow it early in the day on one area of self-improvement, we’ll have less left for other goals. With that in mind, we should pick one area to improve—say, losing 10 pounds or saving 10% of our income—and then, once we’ve conquered that goal, move on to the next one.

Create financial incentives. The federal government offers savers all kinds of tax incentives, including lower tax rates if we buy stocks for the long haul in our taxable account, tax-free growth if we fund Roth retirement accounts, and an immediate tax deduction and tax-deferred growth for contributing to traditional 401(k) plans and traditional IRAs. Those who contribute to 401(k) plans often also have an added incentive, in the guise of a matching employer contribution.

Along the same lines, check out Stickk.com, an intriguing website that allows you to make commitments, with a financial penalty—in the form of, say, a payment to a charity, a friend or even an enemy—if you fail to follow through.

Get competitive. If we compete against others, it can bring out the best in us and push us to try even harder. Knowing that our neighbors exercise five times a week could prod us to follow suit.

But if the competition is too stiff, we may throw up our hands in despair. This isn’t just a phenomenon in the world of sports. Studies suggest that knowing how we stack up financially against others can spur us on—but, if we’re horribly far behind, it can leave us so discouraged that we give up.

Hire a coach. If we don’t have the necessary discipline to exercise, we might hire a personal trainer, who will push us to work out regularly—and whom we’ll likely listen to, because we’re paying for the help and because we don’t want to disappoint our trainer.

We might even turn over responsibility to somebody else. That obviously won’t work with exercising—we need, alas, to be involved—but it’s an option with our financial affairs. A good advisor could bring a degree of discipline and rationality to our investments that perhaps we can’t muster on our own. We should make sure our advisor is a fiduciary, so he or she is legally obligated to act in our best interest.

Go public. An impending dentist’s appointment can unleash a week of flossing. A visit from the in-laws can spur us to clean the house. Our annual physical can prompt us to shed a few pounds.

Such social pressure can also help us improve our finances. Aiming to buy a house within the next year or pay off all credit card debt? If we announce to friends and family that we have these goals, we’re more likely to stick with them.

Indeed, our financial commitments may encourage others. It seems that both good and bad behavior can be contagious. Need inspiration? We might seek out people who have turned their lives around, and use them as our role models.

We might even create formal or informal support groups with others who are also seeking to change. This sort of peer pressure works best when others are encouraging and when we’re anxious to look good in their eyes. Anticipating feelings of pride can be a powerful motivator.

Avoiding shame can also work, but it’s more treacherous territory. If we slip and we’re berated by others, or we beat ourselves up over our failings, we’ll likely feel badly. Result: In an effort to feel momentarily better, we may repeat the bad behavior—and, the next thing we know, we’re back to eating daily Big Macs.

Behavior Change: Talking the Talk

Moral licensing: When we’ve behaved well and feel virtuous, we often give ourselves permission to behave badly. Ran five miles this morning? How about a burger and fries for lunch?

Halo effect: We feel so good about eating something labeled “organic” that we end up overeating. We’re so proud of the money we “saved” by buying items that are on sale that we blow our budget.

Social proof: We tend to follow the crowd—but the crowd can lead us astray. Think about all the folks who piled into tech stocks in the late 1990s and loaded up on real estate in 2005 and early 2006.

Mirroring: We often unintentionally mimic the actions of others, which can either help or hurt us as we seek to change behavior.

Hyperbolic discounting: In our desire for immediate gratification, we favor smaller rewards now over larger rewards later—even if waiting offers a high percentage gain.

October’s Greatest Hits

HERE ARE THE SEVEN most popular blogs from last month:

We Know Jack
Giving: 10 Questions to Ask
Self-Tithing
Double Trouble
Working the Plan
Where We Stand
Preconceived Notions

Our list of the top 10 blogs for the year to date also garnered a slew of readers, as did a blog from September, Driving Down Costs. But easily the most visited page in October was the web version of last month’s newsletter.

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Money Well-Wasted

MOST MONEY CONVERSATIONS, especially with financial advisors, orbit around the concept of increasing dollars.

When is it best to buy stocks? Answer: in a down economy. Reallocate money from bonds.

When is it best to buy bonds? Answer: in a thriving economy. Reallocate money from stocks.

When is it best to save? The answer invariably seems to be: always.

On the one hand, I embrace this concept. A chronic self-tither, I consistently give 10% of my income to savings and sometimes more. On the other hand, despite—or perhaps because of—the habit I just described, I also recognize over-savers can take things too far, robbing themselves of the fulfillment and joy that spending brings.

There’s nothing wrong with spending money—as long as it’s spent on things that deliver plenty of happiness. Research shows we enjoy experiences over things. We most cherish time with friends and family, and also activities where we are in “flow”—those moments when we’re completely absorbed by work or hobbies that we’re passionate about. I recommend 10% Happier for those interested in more on this topic.

For me, such “non-necessary items” include awesome coffee, fancy dinners (preferably with good champagne), pedicures with my girlfriends, personal training, deep tissue massage, life coaching and therapy. All are things I value because they generally involve people I love or they support hobbies where I feel in flow.

I derive no greater joy than when investing in the nutrients on my plate, whether at farmers’ markets or over dinner deserving of a sixth star. As an artist, I thrill at the hue of egg yolks from pasture-raised hens, ruby beets, eggplant purples and the verdant green of rough-chopped beans. As a friend and lover, I feel rich sharing rich nutrients with people I love. As an entrepreneur, I value investing in my body and brain.

I first learned the value of diet when researching ways to reduce crippling anxiety—the kind that prevented focus and sleep—while running my first agency. I was dumbfounded when I learned my “uber-healthy diet” was a major culprit for chronic stress. If we eat crazy chemicals, we feel crazy. If we eat wholesome foods, we feel whole. I’m confident some of my ahas can help you, too:

Most “health food” ingredients are chock-full of chemicals. Simple rule of thumb: Avoid boxes and wrappers.
Low-fat diets limit creativity and happiness. Optimal brain function requires that one-third to half of calories come from fat.
It’s easy to ruin “good fat.” Olive oil goes bad when heated. Instead, cook with fats that are solid at room temperature, like coconut oil, ghee or duck fat.
We get depressed when we don’t eat enough complex carbs. (They metabolize as happiness-producing chemicals, like dopamine and serotonin.) Our bodies absorb the most nutrients from sprouted, organic grains.
When it comes to meat, the current FDA definition for “organic” is extremely loose. The wrong meats can make our bodies hotbeds for disease. Purchase grass-fed meats, free range chicken and wild caught fish.

For me, eating good food thrills my taste buds, while positioning me to be my best self. The experience is also a reminder that I live the life I choose, that I’m always in control.

Since good food can be insanely expensive, especially grass-fed meats, here are a few cost-effective solutions I’ve found that you might find useful, too:

One in five fruits and veggies don’t meet most stores’ cosmetic standards. Imperfect Produce delivers food to consumers that grocery chains consider too ugly to sell—at 30% to 50% below the normal cost.
Most grocery store prices are high because they’re effectively the middleman between food producers and consumers. Businesses like Thrive Market eliminate middleman costs and offer healthy, organic food at wholesale prices, generally 25% to 50% below retail.

Caitlin Roberson, author of 30 Ways to Happy , lives and works in Silicon Valley, where she helps top tech executives change the world through business storytelling. Her previous blog was Self-Tithing. Caitlin obsessively lifts weights and attends hip-hop classes, so she can tithe in Napa, guilt-free. You can learn more about her at CaitlinRoberson.com  and follow her on Instagram @CRobRobber .

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A Year for Generosity

MANY OF MY CLIENTS make donations to their favorite philanthropies in the final months of each year. With lower tax rates in the offing, this could be a good year to make such gifts—especially for those who have appreciated property to donate.

Many clients reflexively write checks, as that’s the easiest way to qualify their gifts for charitable deductions. But before they reach for their checkbooks, donors who want to make major gifts—and also lose less to the IRS—will do themselves a favor if they first familiarize themselves with other often-overlooked ways to contribute.

For instance, the charitably inclined realize significant tax benefits when they donate appreciated property owned for more than 12 months that would otherwise be taxed as long-term capital gains when sold. Some common examples are shares of individual stocks, mutual funds and exchange-traded funds.

The “give ’em away” gambit permits contributors of appreciated assets to deduct their full market value when donated. Savvy benefactors also avoid all of the federal and state taxes assessed on profits realized from the sale of these investments, effectively decreasing the cost of donations.

An example: Alex Vennebush decides to fulfill pledges aggregating $20,000 to several schools. Astute Alex also wants to diversify his investment portfolio. He decides to sell $20,000 in shares of Lady Godiva Accessories (LGA), one of his big winners that has skyrocketed in value since he paid $2,000 for the shares a number of years ago.

How will this all play out when Form 1040 time rolls around? For the 2017 tax year, Alex expects to be in a combined federal and state bracket of 35%. Although sending checks totaling $20,000 will trim his taxes by $7,000, he’ll be liable for federal taxes of $2,700 (15% of the $18,000 profit) on the gain from the LGA sale. (Like most other individuals, Alex’s federal long-term capital gains rate is 15%. The rate goes as high as 23.8% for those who are in the top ordinary income-tax bracket of 39.6% and subject to the 3.8% Medicare surtax on investment income.)

As a less taxing alternative, I advise Alex to donate the LGA shares to the schools. They’re all tax-exempt entities that incur no taxes when they sell the shares and so end up with close to the same amount of money. Not only does Alex garner the same $20,000 write-off and $7,000 tax reduction, but he also avoids the $2,700 capital gains tax levy. His total savings of $9,700 effectively decreases his $20,000 contribution’s cost to $10,300.

Keep two key caveats in mind. First, there’s no additional tax break if Alex donates shares owned less than 12 months. The IRS restricts his write-offs to what he paid for the shares or their current value, whichever is less. Second, Alex shouldn’t donate depreciated shares or other losing investments. Instead, he should sell the shares and then donate the sales proceeds to charities. That will allow him to claim both the donation deduction and the capital loss.

What should Alex do if he’s unsure whether to relinquish his position in LGA? He should still donate the shares, while using the $20,000 in cash that he would’ve otherwise donated to repurchase the shares. That way, he preserves the $20,000 deductions and dodges $2,700 of capital gains taxes on the $18,000 gain. Moreover, his repurchase makes it possible for him to measure any gain or loss on a subsequent sale against the new, higher cost basis of $20,000, not the original one of $2,000.

That brings us to 2017. President Trump is adamant that his top priority is to lower tax rates. If he and Congress cut that kind of deal, when would the reduced rates take effect? Probably prospectively, beginning with 1040 forms for the 2018 tax year, which will be filed in 2019, a change that could cause Alex’s bracket for 2018 to drop below 35%.

What to do? I recommend Alex accelerate into 2017 donations that he intends to make in 2018. But, you might wonder, what difference does it make when he deducts his charitable donations? By donating in 2017, Alex garners the tax savings one year sooner—and, as an added bonus, he applies his donation deductions against higher-taxed 2017 income, instead of lower-taxed 2018 income.

Julian Block writes and practices law in Larchmont, NY, and was formerly with the IRS as a special agent (criminal investigator) . His previous blogs include Losing Interest and Capital Punishment. This article is excerpted from Julian Block’s Year Round Tax Strategies, available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.

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