- Eight years into a bull market, taking some profits is prudent. Yet for taxable portfolios, the capital gains hit can be a disincentive to rebalance.
- Donating appreciated stock and other assets to charity is a triple play: You book profits, avoid the capital gains tax and pocket a charitable deduction.
- If Washington passes tax reform, the value of a 2017 donation will be greater than in 2018.
Giving away stocks, or other appreciated assets is an especially timely move to consider before year end.
With the S&P 500 index up more than 300 percent and the Nasdaq more than 400 percent since the March 2009 low, any money in taxable accounts has likely produced some hefty unrealized capital gains. Even if you want to rebalance — you do, right? — you're not exactly looking forward to the tax bill.
Donating stock, fund shares — or just about any appreciated asset — will wipe out any capital gains tax bill assuming you owned the asset for at least one year. You can also claim the value of the donation as a charitable deduction in the year you make the move.
"If you're charitably inclined, instead of making cash donations, giving an appreciated asset is always smart, and especially now given market valuations," said Anthony LoCascio a Clinton, New Jersey, certified financial planner with serious tax chops. (He's also an enrolled agent.)
Washington is providing another incentive to consider donating stock or other assets. If current tax reform proposals to lower individual tax brackets — and raise the standard deduction — become law, the value of donating an appreciated asset in 2018 will be lower.
Indeed, plenty of investors seem to be catching on to the idea of donating appreciated assets. Schwab Charitable reported that of the more than $3 billion contributed to donor-advised funds in the 12 months to July 1, fully 68 percent was noncash contributions.
Schwab said the majority of noncash contributions were securities such as stocks, bonds and fund and ETF shares. In the comparable 2013 period, 42 percent of contributions were noncash assets.
If you know the charity you want to donate to, and it has the ability to accept a security, you can always make a direct donation. But you might also want to check out one of the fastest growing tools in the giving world: a personal donor-advised fund.
You can always fund it with cash, but appreciated stocks, fund shares, private-company stock, LLP shares, IRAs, real estate and private equity stakes are just a short list of accepted assets that can also be used to fund your donor-advised fund.
Last year, the DAF arm of Fidelity — Fidelity Charitable — took in $7 million in donated bitcoin. Appreciated assets are sold at the time of the donation and your DAF account is credited with the market value of the sale proceeds. And to repeat the good news: No capital gains tax is due.
Sheryl Sandberg recently donated $100 million worth of Facebook stock to a family DAF, but deep pockets are far from required. Fidelity Charitable and Schwab Charitable accept new DAF accounts starting with $5,000. Vanguard Charitable requires $25,000 to get going. Once your DAF is funded at one of these outfits, making a grant at any time is just a few mouse clicks away.
Money that lands in your DAF must be used to make a charitable grant. No "mulligans" allowed. But there's no gifting rush. You can start granting out immediately, or you can wait months, or years. While your money remains in your DAF, you choose how it is invested. Typical options include cash accounts and a variety of funds. The all-in cost of the DAF and the underlying funds can run around 0.80 percent to 1 percent or so, depending on where you hold your DAF, and the investments you choose.
That's not nothing. But there are some serious tax-planning gains you can pocket by using a DAF, in addition to avoiding capital gains on appreciated assets.
The problem with scoring a big payout is that it likely pushes you into a higher income tax bracket.
"Front-loading a donor-advised fund can be a great way to offset income," said Alexander Gross, a certified financial accountant and certified financial planner at Daintree Advisors in Boston.
You can donate a big chunk of money into a DAF, grab the deduction this year, and take your time making grants out to charities. For example, if you typically donate $10,000 a year to charity, you could put $50,000 into a DAF this year, grab the tax deduction right now and then make $10,000 in grants over each of the next five years.
(A bit of IRS housekeeping: When you donate an appreciated asset, your deduction is limited to 30 percent of your adjusted gross income for that year. There's a five-year "carry forward" rule that allows you to keep writing off the donation in subsequent tax years.)
"Once we know the extra taxable income a client will have on the Roth conversion we will often recommend using a DAF contribution to manage the tax bill," Gross said.
Current tax reform proposals call for eliminating the federal estate tax. But until that becomes law, a donor-advised fund can be a valuable planning tool if you are in the crosshairs of any federal or state estate tax. Moving money to a DAF reduces the value of your taxable estate, entitles you to the charitable contribution deduction today, yet you can keep the money growing if you want. When you die, the proceeds can be paid out to charities you've designated, or the DAF can live on, managed by your named successor(s).
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