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Capital Gains Tax: How to Trim the Tax Bite

A past article from the CFA Institute covered the downside of something most investors like: a bull market. Anyone looking to sell appreciated stock is unfortunately going to trigger a tax on capital gains. The current legislative and political climate has produced rumblings of a potential doubling of capital gains tax.

If such legislative action would come to pass, what potential solution exists to lessening that tax bite? The CFA Institute article referenced a solution … donating to charity to avoid the capital gains tax.

A specific solution to lessen that tax bite: charitable gifting using 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 (100% for 2021).
  • 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.

Regardless if you are facing the pain of a pending tax bite tax, or have other needs concerning charitable planning, contact us to discuss your options.

The commentary presented herein contains the opinions of Lions Wealth Management, Inc., a State of Minnesota Registered Investment Advisor.   This information should not be relied upon for tax purposes and is based upon sources believed to be reliable. No guarantee is made to the completeness or accuracy of this information.  Lions Wealth Management, Inc. shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions contained herein or their use, which do not constitute investment advice, are provided as of the date written, are provided solely for informational purposes, and therefore are not an offer to buy or sell a security. Investments in securities are subject to investment risk, including possible loss of principal. Prices of securities may fluctuate from time to time and may even become valueless. This information has not been tailored to suit any individual.