Archive for the ‘Question of the Day’ Category

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Why do you need to keep records of your charitable donations?

Wednesday, September 23rd, 2009

The government is prepared to award you tax deductions in return for your charitable donations, but it’s up to you to prove those donations were actually made. The IRS requires a great deal of documentation to ensure that all your donations are legitimate, so it’s essential to keep good records and make sure your chosen charities received everything you gave them. The specific requirements for tax deductions are as follows.

If your donation was money, you need to provide a credit card statement, canceled check, or bank statement that details how much, when, and to whom you donated, as well as written acknowledgment from the charity of how much you paid them and when. If your donation was more than $250, the acknowledgment letter should also include whether the charity gave you anything in return for your donation, and if so, the approximate value of the services rendered.

Property donations also get you tax deductions, but the records you keep have to be much more detailed. Every property donation can be tax deductible only if at least the following records are provided: the name and address of the charity, the date of the donation, a description of the property and its location, an estimated value for the property and how you arrived at that number, and the amount you want to be paid as a tax deduction. If the property is worth more than $250, there are even more rules:

  • For property donations from $250-$500, you also need an acknowledgment letter from the charity.
  • From $500-$5,000, you must document how and when you acquired the property, as well as how much it cost you.
  • If you estimated the property’s value at more than $5,000, you need a qualified appraiser to verify your estimate.

It’s important to keep records of all of the above, as well as any additional documents that can help prove you actually made the donation. If any piece is missing, you probably won’t get any money back.

Why is there a limit to political giving?

Wednesday, September 23rd, 2009

Campaign finance laws determine how much you’re allowed to give to a political candidate or party that you support. The limits placed on those contributions might seem unfair – how come you can’t give as much money as you want if you support a candidate? Candidates who get elected wield a lot of power: they write laws, hire companies for big government contracts, and make all sorts of decisions that affect your life and your business. When people give money to a campaign, they gain some influence over that candidate, who will tend to look favorably upon the desires of his biggest contributors because he wants to keep receiving their support.

If there were no limits to campaign contributions, certain people would have way more political power than others just because they have more money, which would undermine the very idea of democracy. Money gives people all sorts of additional power that people with less money don’t have and that is not necessarily a bad thing – money can create jobs or fund the arts or help lift people out of poverty. However, the political freedoms that make our vibrant, dynamic economy possible only exist because of our strong democracy which is based on the idea that all men (and women) are created equal. You only get one vote for a reason; campaign finance limits are just an extension of that same idea.

Should you give down the street or across the ocean?

Wednesday, September 23rd, 2009

There’s no cut-and-dry answer for this. You should give to a cause you believe in because it makes you feel good and it’s the right thing to do. Giving to a local charity might be especially satisfying because you’ll more easily be able to see the results of your giving firsthand. However, if you can travel abroad and get involved in or at least see close-up the cause to which you choose to give, that could also be a worthwhile, gratifying experience.

The tax breaks you can get for making charitable contributions come with certain limitations. Foreign charities are not eligible for tax deductions, so you won’t save any money on your taxes if you donate to these charities. Many charities that do work in foreign countries are based in the United States and are still eligible.

Do people pay back microloans?

Wednesday, September 23rd, 2009

Microloans are not simply charitable donations, but actual investments or business arrangements where there is some risk involved. Unlike regular loans though, the people who take out microloans usually can’t offer any typical type of collateral – something like a house or car that the bank could seize if the person defaulted on the loan. What motivates people to pay back microloans is a combination of a desire for a better life and, frequently, a commitment to other people in a lending group. For example, many micro-lenders are a part of a group that commits to paying back the loan. This means that if one person “defaults” the rest of the people in the group are responsible for covering their share. Not only does the borrower make a commitment to the institution lending the money, but also their friends or family. Talk about peer pressure!

Paying back a microloan means more than just fulfilling an obligation – it’s the honor of keeping your word and could mean a successful entrepreneurial venture and more money in the home. That may be why the payback rate is so high for microloans – there is actually a lower default rate for microloans than there is for student loans in the U.S.!  If you think it’s acceptable to take a “chance’ on an American student’s college education, then helping a man or woman provide for a family might be a no-brainer.

What is microfinance?

Tuesday, September 15th, 2009

Microfinance is a way of providing financial services like savings accounts, loans, and insurance to poor people around the world. It is aimed at people who may not qualify for typical financial services because they have limited resources or there are no financial institutions where they live.

By not being able to access financial services that are available to most everyone in more developed countries, these people have little means of improving themselves and their society. The goal of microfinance is to break this cycle of poverty by empowering people who have great ideas, no matter how poor, with the tools and resources to achieve them.

Why do some stocks pay dividends while others don’t?

Monday, August 10th, 2009

A dividend is something “extra” that you get for being an investor or shareholder. It comes from additional money a company has after its normal profits are tallied. When a company makes these extra profits, it has two choices: pay dividends to its investors or reinvest it back into the company.

If a company is young and on the move, it usually chooses to reinvest these profits. That’s because it still has a lot of potential to grow and grow quickly. These extra funds would help it do so.

On the other hand, when a company has already built a reputation, it typically uses the profits to pay dividends to its shareholders instead. Investors often interpret the choice to offer dividends as a sign of a company’s confidence in its business. Other investors specifically invest in dividend yielding stocks as a strategy. Even though the company may not be growing by leaps and bounds, it can still deliver top-notch value to its investors, hence, the dividend. For instance, a long-standing company like Johnson & Johnson (JNJ) might pay a dividend while a faster moving company like Google might choose to reinvest those funds.

Why do companies release annual reports?

Monday, August 10th, 2009

Every public company is required by the SEC (Securities & Exchange Commission) to provide a document known as an annual report. In this annual report, the firm describes the financial results of the past year and also the outlook for the future. It is the place for the company to communicate business objectives, strategy, governance, and financial metrics to current and future investors.

The annual report is given to shareholders, and is also made available to the general public. Basically, anyone who wants to know how a company has  been doing in the past and where the company wants to be going in the future will find an annual report quite useful.

What happens if you don’t pay back a loan?

Monday, August 10th, 2009

Normally, people who can’t pay their loans declare bankruptcy, which is basically an acknowledgment that you are incapable of recovering from your debt. If you’re really in over your head, sometimes bankruptcy can be the only option, but it’s generally a last resort – your debts are forgiven, but your credit score takes a massive hit. And with a low credit score, it’ll be a lot harder for you to get loans in the future.

But suppose you don’t declare bankruptcy and just soldier on without repaying what you owe. What happens then? At first, you probably just continue “rolling-over” the loan and paying more and more interest on the item you purchased.  If you took out a loan for a tangible item, the lender usually comes to repossess it. For example, if you’ve leased a car and you stop paying the lease, the company that loaned you the car will just take it back.

But if there’s no way for the lender to repossess the loan (if the loan was money, for example), the company has to take the matter to court. The lender can decide either to sue you (which basically forces you to either pay back the loan, declare bankruptcy, or be convicted in court), or to garnish your wages, which means that a judge decides to award a certain percentage of your paycheck to your creditor until the loan is repaid.

Once you get into serious debt, it’s very difficult to get out unscathed, so it’s better to avoid that decline altogether; you’ll just get forced into one of the above positions, and all of them have unpleasant consequences.

How much do you have to give to make your contribution count?

Monday, August 10th, 2009

How much you give to charity really isn’t as important as the fact that you give something. However, you might consider that charitable organizations spend a whole bunch of their time and money just asking you for more cash. If you only give a couple dollars a year to an organization, it might get eaten up just by all their continued efforts to get you to give more. So it makes sense to focus on the causes that you really care about, and give more to them. To learn more about which causes matter to you, check out the TILE GIVE section.

What does it mean to be Sharia-compliant?

Monday, August 10th, 2009

Sharia, or Islamic law, strictly forbids the lending of money for fees or interest. Today, many modern Muslim countries (such as Saudi Arabia, Pakistan, and Malaysia) still rule according to elements of Sharia law. So, in order to bring banking to the Islamic world, investors have created products and services that are Sharia-compliant, or that follow the principles of Islamic law.

In order to be Sharia-compliant, an institution cannot offer or receive interest, nor can it profit from any activities considered illegitimate, such as gambling, tobacco, drinking, or pornography. But how can Sharia-complicit banks profit if they can’t offer loans at a rate of interest? So far, there are several varieties of transactions that produce profits without breaking Islamic principles, but the most basic method is through risk sharing. According to this model, a Sharia-compliant bank shares the risk of an investment with a customer, and the two split any profits. There are also mortgages, current accounts, and even personal loans that are Sharia-compliant.

The goal of all these modified products is to attract Muslims who don’t currently use established banking because they want to live according to their religious principles. This is an incredibly valuable target demographic because Islam is the largest religion in the world, and for a long time the Western business world wasn’t catering to the needs of this group. So financial institutions think it’s worthwhile to tweak their established methods if it means securing an untapped market.

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