Ivy League Tax Problems

They say that "what goes up must come down." But that's not true when it comes to college costs. U.S. News reports the average private college tuition stood at $16,233 back in 1997-98 — roughly $24,973 in 2017 dollars. But the same tuition today costs $41,727. And that's before pricing in luxuries like, you know, meals, and a place to sleep. In-state college costs are rising even faster as legislatures cut budgets for higher education. That means colleges are increasingly turning to alternate funding sources, including their endowments.

In academia, though, as in so many other parts of our "winner take all" society, there's the 1%, and there's everyone else. America's richest 800 colleges and universities hold over $500 billion in endowments, which sounds like there should be plenty to help supplement tuition and fees. But the top 1% of schools hold over $10 billion each, and 11% of schools hog 74% of those assets. That leaves the Faber Colleges of the world essentially fighting over scraps. ("Knowledge is good.")

Now, the Phi Beta Kappas who write our tax code have turned their green eyeshades towards those mammoth pools of tax-free wealth. Both the House and Senate tax bills working through Congress would impose a 1.4% excise tax on net investment income of private colleges holding more than $250,000 per student. That group includes about 70 schools, including obvious targets like Harvard, Yale, and Princeton. At the same time, the proposal spares public school systems with big endowments like the Universities of Texas ($25.4 billion), Michigan ($9.7 billion), and California ($7.4 billion).

It's true that if any schools have "too much money" (LOL), it's the top-shelf Ivies. Harvard's endowment started in 1638 with £779 and 400 books. Over the next 379 years, it's grown to over $37 billion (and 16 million books), leading critics to call it a hedge fund with a university attached. In 2015 that fund grew by just 5.8%, compared to rival Yale's 11.5%. But Harvard Management Company paid its chief executive a whopping $14.9 million, with his deputy taking home $11.6 million. (And you thought college football coaches were overpaid!)

Academic endowments have grown so large that they're starting to use some of the same tax strategies as the richest individuals. The New York Times recently exposed how colleges use offshore entities to boost earnings, including "blocker corporations" that let them avoid tax on debt-financed "unrelated business taxable income." (Trust us, those UBTI rules are even more boring and technical than they sound.)

But naturally, academics are irate at the proposal, rolling up their leather-patched tweed sleeves and prepping for a (genteel) fight. "Endowments support substantial student aid and student service programs, and provide funding for instruction, research, and for building and maintaining classrooms, labs, libraries, and other facilities," said the Association of American Universities. At Princeton (the #1 target with $2.5 million per student), undergraduates from families earning under $56,000 pay no tuition, room, or board, while those from families earning under $160,000 pay no tuition. 

Here's the good news. You don't have to be an Ivy League university — or even have an Ivy League education — to save big on your tax bill. You just need a proactive plan. So call us when you're ready for some real-world lessons on how to pay less!

Cleveland Rocks!

Cleveland, Ohio has historically been one of America's most populous and productive cities, peaking as the fifth-largest back in 1920. Today, "C-town" is a shadow of its former glory, another Rust Belt factory town, best known for the Rock and Roll Hall of Fame. But last week, Clevelanders had reason to celebrate once more. Are we talking about the Republican National Committee's decision to host their 2016 nominating convention in the city dubbed "the Mistake on the Lake"? Of course not! We're talking about basketball superstar LeBron James's decision to leave the Miami Heat and return to the city where he spent the first seven years of his career.

On the face of it, James's decision seems curious. Few athletes with any choice in the matter would happily trade Miami's bright lights, sunny pastels, and Caribbean vibe for Cleveland's cold winters, gray skies, and flammable river. But LeBron, who grew up in nearby Akron, believes in home — and for him, the move is a slam dunk. "My presence can make a difference in Miami, but I think it can mean more where I’m from," he told Sports Illustrated. "I want kids in Northeast Ohio . . . to realize that there’s no better place to grow up. Maybe some of them will come home after college and start a family or open a business . . . Our community, which has struggled so much, needs all the talent it can get."

Cleveland fans aren't the only ones who will applaud LeBron's move. You can be sure that basketball fans at the IRS will cheer, too. LeBron will make a reported $20.7 million per year in Cleveland — $1.6 million more than the $19.1 million he earned last season in Miami. He'll pay the top income tax rate of 39.6% on that difference, along with an extra 3.8% Medicare tax — and that, in turn, will mean about $694,000 more for Uncle Sam. (His total Medicare tax on his playing salary will reach almost $785,000, or nearly enough to pay for a heart transplant.)

But the biggest winner here may be the Ohio Department of Taxation. Last season, LeBron played his home games at Miami's American Airlines Arena, where he enjoyed Florida's lack of personal income tax. When he returns to Cleveland's Quicken Loans Arena, he'll pay Ohio's top rate of 5.421%. That's no mere technical foul — state taxes on the half of his games that he'll play at home will run more than half a million dollars per year!

Fortunately for LeBron, he makes his real money off the court. In 2013, he collected a whopping $50 million in endorsements from Nike, Coca Cola, Cadbury Schweppes, Juice Batteries, Upper Deck, Cub Cadet, McDonald's, Microsoft, and State Farm — among others. He was an early investor in Beats by Dre, and reportedly parlayed that stake into $30 million when Apple acquired the headphone maker. But LeBron will keep his residence in Florida, which should shelter the bulk of his financial three-pointers. No less a business authority than Warren Buffett has said of LeBron, "He's savvy. He's smart about financial matters. It's amazing to me the maturity he exhibits."

When it comes time to pay all those taxes, you can be sure that LeBron James doesn't just drop off a shoebox full of receipts with his accountant on April 15. He's got a plan to "defend his net" as vigorously as the law allows. Now, you probably can't fill Lebron's size-16 sneakers. But you can take advantage of the same sort of proactive planning that superstar athletes use to save millions. And you don't even have to wait for free agency! You just have to pick up the phone and call us. So, what are you waiting for?