DAFs Can Trim the Capital Gains Tax Bite

Directly depositing appreciated stock into a donor-advised fund can also provide other tax savings.

By Eric Kinaitis

Although most investors like a bull market, anyone looking to sell appreciated stock is unfortunately going to trigger a tax on capital gains. Periodic changes in the legislative and political climate produces occasional rumblings of a potential increase of capital gains tax.

What potential solution exists to lessening that tax bite? Charitable giving.

A specific solution to lessen that tax bite: a donor-advised fund (DAF) Provided the shares have been held longer than a year, they 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.

Additional tax savings

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

This article originally appeared in AEF Insights, a publication of American Endowment Foundation. Eric Kinaitis is editor of AEF Insights.

 

 

 

 

 

Latest news

More Retirees are ‘Unretiring,’ Survey Reveals

Advisors say near-retirees and retirees are much less prepared for retirement than they think they are, according to Allspring.

Advisors Dabbling in DC Market Seek Greater Support: Cerulli

Providing them with tools, education and guidance would help them grow their retirement-plan businesses, says Cerulli Associates.

Executives Traveling on Corporate Jets Face IRS Scrutiny

Do you have executive clients who might be using a corporate jet for personal use? Tell them the IRS has announced a crackdown.

U.S. Solo Renters Age 50+ Way Up

The number living alone rose by more than half a million, but there’s been a growing trend of older people living with roommates.

SEC Settles Charges Against Former Advisor

The former advisor, Andrew Komarow, was known in the industry for working with special needs families and neurodivergent clients.

SEC Fines TIAA Unit $2.2M for Violating Reg BI

The SEC said a TIAA broker-dealer charged some retail customers too much to invest in mutual-fund choices in an IRA.