Year End Tax Strategies

Strategy #1 – Donate shares of highly appreciated securities instead of cash


If you are considering making a year-end gift to a charity you have the opportunity to use the tax code to your advantage. This is an effective way to both help your favorite charities and reduce the tax bite that you will feel when you file your tax return next year. The mechanics of this tax planning strategy are fairly simple.

First a bit of background. When you donate cash to a qualified charity you get to deduct the gift on your tax return. For example, if you give $5,000 and you are in the 33% tax bracket your federal income tax that you pay will be reduced by $1,650 ($5000 x 33%). So, in effect your $5,000 gift will only cost a net $3,350. If you live in a state with an income tax you would save even more on your taxes.

Now let’s assume that instead of gifting cash you instead gift an investment security that also has a value of $5,000. But let’s further assume that you paid $2,000 for the security. This means that you currently have a $3,000 capital gain since you purchased it.

If you give the security this security that is worth $5,000 you will get a charitable deduction of the $5,000, just as you would if you gifted cash. However, you will also avoid paying the capital gains tax, and this will save you additional money. The math on this is fairly simple and is as follows:

If you were to donate the $5,000 security you would avoid paying $450 in federal capital gains taxes (gain of $3000 x 15% capital gains tax). This means that your charitable gift will cost you only $2,900 (after tax cost of a gift of $3,350 reduced by the capital gains tax savings of $450). By avoiding the capital gains tax, you are keeping an additional $450 in your pocket.

Importantly, this strategy may not be applicable if you are in one of the two lowest tax brackets. This is because in these tax brackets the federal capital gains tax is 0%. However it still may be beneficial if you live in a state with an income tax.

Conversely, this strategy will be even more effective if you are in a high income tax bracket, where you may pay an additional 3.8% tax on net investment income, and, if you are in the very highest tax bracket, a capital gains tax of 20%.

The tax code is complex, and seems to take an ever increasing bite out of our incomes. However, with knowledge of the tax code you can reduce the amount of tax that you pay. We work closely with our customers on tax planning strategies. If you would like to talk to us about tax planning opportunities please give us a call.