Capital Gains Tax: How to Trim the Tax Bite

By Eric Kinaitis

An article in ThinkAdvisor covered the downside of something that most investors like: a bull market. Anyone looking to sell appreciated stock is unfortunately going to trigger a tax on capital gains. The article referenced the math: a long term capital gains tax at potentially up to 20% and a possible additional 3.8% surtax on net investment income for certain investors can lead to an unwelcome tax bite, removing the " appreciation" that an average investor should normally have for an appreciated asset.

The solution to lessen that tax bite: a donor advised fund (DAF.) Provided the shares have been held longer than a year, shares can be directly deposited into a donor advised fund, with the donor enjoying a tax deduction based on the full market value of the stock.

This transaction allows the donor to save what they would have paid in taxes and instead use the value of the shares for charitable giving through their donor advised fund.

For those individuals who normally do not give much thought into charitable donations, the tax bite they may be facing due to capital gains can provide the impetus they need. Faced with paying a capital gains tax to the government (and having no say in how the government chooses to spend that tax money) vs. placing the appreciated shares into a DAF, negating the capital gains tax liability, and having the value of those appreciated shares fund causes they want to support can provide enough reason to open a DAF.

Reducing capital gains tax is not the only way for a donor advised fund to lessen taxes. DAFs can provide other tax savings including:

1.) Income Tax: You receive an immediate income tax deduction in the year you contribute to your DAF. Since a DAF is administered by a public charity, contributions immediately qualify for maximum income tax benefits. The IRS does mandate some limitations, depending upon your adjusted gross income (AGI):

• Deduction for cash – up to 60 % of AGI.
• Deduction for securities and other appreciated assets – up to 30 % of AGI.
• There is a five-year carry-forward for unused deductions.

2.) Estate Tax: A DAF is not included in the account holder's estate.

3.) Tax-Free Growth: Investments in a DAF can continue to appreciate tax-free.

4.) Alternative Minimum Tax (AMT): If you are subject to alternative minimum tax (AMT), your contribution may reduce your AMT impact. While contributions are deductible for AMT purposes, whether it reduces an individuals’ AMT depends upon individual circumstances.

5.) Reduced Medicare premiums deducted from Social Security: The premiums withheld from Social Security benefits for Part B and prescription drug coverage are now means tested. According to Mark Miller, CPA & Tax Partner at Sikich LLP, Milwaukee, “Higher income taxpayers can pay a much larger premium for this coverage. For example, a married couple with adjusted gross income (AGI) in excess of $428,000 could pay more than $8,000 in additional premiums. The adjustment is based upon a taxpayer’s AGI from two years earlier. Avoiding gain recognition by contributing appreciated securities (that could otherwise be sold) toward charitable causes can reduce the impact of these rules.”

Regardless if your client is facing the pain of a pending tax bite tax, or has other needs concerning smarter charitable planning, contact American Endowment Foundation or call us at 1-888-660-4508. We look forward to discussing how we and a donor advised fund can help your client.