Gifts of Securities

A stock portfolio is often among the most valuable assets you own, and one that carries substantial capital gain—appreciation in value. The downside to assets that have increased in value over the years is that the federal government is prepared to levy taxes of up to 15 percent on your capital gain from securities. With careful planning, you can reduce or even avoid federal capital gains tax. We can show you how charitable giving may be one of your best defenses against capital gains taxes.

As stock prices increase, so do the taxes you owe on the capital gain, which are generally charged at a rate of 15 percent (5 percent if you are in the 10 percent tax bracket). But when you donate publicly traded stocks held long term (owned for more than one year) to a qualified charitable organization such as your favorite charitable organizations, you avoid all capital gains taxes. Plus, you may take the full fair market value of the stock gift as a charitable deduction on your income taxes. The maximum deduction you may take within a given tax year is 30 percent of your adjusted gross income. If you are unable to take the entire deduction in one year, you may carry the excess deduction forward for five additional years.

Even if you own stock you wish to keep in your portfolio, giving us the stock and using cash to buy the same stock through your broker provides the same income tax deduction with a new, higher basis in the stock.

If you have stock losses, sell the stock yourself to realize the loss and take the deduction for tax purposes. Then generate a charitable deduction by donating the cash proceeds of the sale to charitable nonprofits.

How Much of Your Estate Will Go to Taxes?
For managing your capital gains, three aspects of the federal tax rate structure are significant.

1. The spread between the top federal tax rate applied to long-term gain and the highest tax rates applied to ordinary income is significant. Long-term capital gains tax rate is 15 percent for most assets (28 percent for some). Current tax rates for ordinary income exceeding specified amounts in each tax bracket are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent. For taxpayers who fall within the higher tax brackets, long-term capital gains tax is more attractive than ordinary income tax.

2. Both estate and gift taxes are computed using the unified rate schedule, where the rates of tax range from 45 percent up to 46 percent.

3. The tax on generation-skipping transfers of assets is a flat 46 percent. Should you pay capital gains tax now, instead of a higher gift or estate tax later?

Ways to Take Advantage of Your Capital Gains
You can achieve many desirable tax benefits through your philanthropic plans, but there are several noncharitable strategies that should also be considered for reducing your taxable estate.

Tax deferral. There is no taxable gain on appreciation until an asset is sold or exchanged.

Capital losses. Capital losses incurred can offset other taxable income.

Excludable lifetime gifts to others. Gifts to heirs during your lifetime qualify for the gift tax exclusion of $12,000 per recipient per year (indexed for inflation) or $24,000 if your spouse joins in the gifts. The recipients, however, inherit the cost basis of the original owners.

Stepped-up basis for heirs. Most appreciating assets held for distribution to heirs in the estate settlement process completely avoid the capital gains tax. If they are part of a taxable estate, however, the unified estate and gift tax will be on the higher appreciated fair market value. In larger estates, this future transfer tax may exceed a current capital gains tax and requires careful analysis.

If such assets remain in the estate, to be transferred to heirs at the stepped-up value at the date of death (or an alternate valuation date six months later), this becomes the new basis for the heirs and reduces their capital gains tax liability when the assets are sold.

Using Gains to Achieve Your Philanthropic Objectives
Income tax charitable deductions have become increasingly significant in reducing taxable income, particularly since tax reform has eliminated many other tax deductions.

When appreciated property held long term (owned more than one year) is used for a charitable gift and the property is otherwise to be sold by the donor for market or other reasons, two tax savings result. First, the donor is entitled to a charitable deduction for the full fair market value rather than the original cost, and second, the donor avoids the capital gains tax. A third, smaller savings results from avoidance of any commission cost, which is incurred by charitable trust.

Whenever income tax deductions for gifts to publicly supported charitable organizations are claimed for gifts of long-term capital gain property, the total of such deductions that can be used in a particular year is limited to 30 percent of the donor's adjusted gross income, rather than the 50 percent annual limitation for cash gifts. For most donors, the total deduction is typically all usable, since it can be carried forward for five years.

Charitable gift options come in many shapes and sizes. We are happy to provide projections of results from any of the following plans that may be of particular interest.

Outright Gift of Capital Gain Property
Bob gives us shares of publicly traded stock he has held for more than one year. Their fair market value (the average of high and low trades for the day of the gift multiplied by the number of shares) is $12,000; their original cost, $5,000. His marginal federal income tax rate is 28 percent, and he is not subject to state or local income taxes.

The $4,410 of total taxes ($1,050 capital gains + $3,360 income tax) avoided that the government "contributed" to the gift transaction nearly equals Bob's net cost, and Bob has made a gift of $12,000 to his favorite charitable organization.

Please check with your favorite charitable organizations before making any gifts of this type. Please contact Mary Ludwig, Development Director at 712-732-5127, for more information.


The information on this site is not intended as legal, tax or investment advice. For such advice, please consult an attorney, tax professional or investment professional.

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