Opus News & Insights

'Tis Better to Give and to Receive
Monday, February 16, 2015

The Benefits of Year-End Gifting

‘Tis the season for gifting! But rather than gifting a fruitcake or yet another set of bath towels, perhaps consider appreciated assets this year instead.

Gifting to Charitable Organizations

Gifting assets is a great way to satisfy your charitable donations to non-profits or charities. While many of us make annual donations to our favorite charities, gifting appreciated assets rather than writing a check can really pay dividends come tax time.

With the stock market hovering around all-time highs, investors with taxable accounts have likely accumulatedsignificant unrealized gains. While we diligently harvest losses for clients, for many investors selling financialassets means creating capital gains. Gifting these assets is a fantastic way to avoid paying taxes on appreciated positions.

Capital gains are taxed at 15% if you fall in the middle tax brackets. Those investors in the highest tax bracket pay 20% on long-term capital gains. Additionally, individual investors over $200,000 in adjusted gross income ormarried couples over $250,000 are charged with an added 3.8% Medicare tax on capital gains from the Affordable Care Act, so the total capital gains rate can be as high as 23.8%.

As an example, let’s say you are in the 33% tax bracket and bought stock two years ago that has now doubled in value. Each year you gift $10,000 by writing a check to your favorite local charity. If you itemize your deductions on your federal income tax return, this gift counts as a $10,000 charitable deduction and reduces your income tax by $3,300. Viewed another way, the cost of the stock gift to you is $6,700. Additionally, you would also avoid the $940 in capital gains tax that would occur when you sell the stock.

This works not only for appreciated individual stock names but also for appreciated mutual funds or exchange traded funds. Individuals with concentrated positions get the added benefit of “gifting away” stock-specific risk.If you are planning to make a gift this year to a non-profit or charity, we encourage you to contact the organization to determine if it accepts appreciated assets.

Gifting to Family Members

Transferring low-basis assets to a family member in a lower tax bracket has tax advantages, as capital gains tax can be reduced or in some cases avoided altogether. The asset’s cost basis is passed along to your child or grandchild, so gifting is most effective when the recipient is in a lower tax bracket than the individual making the gift. If a family member falls in the lowest two tax brackets, encourage them to sell the asset and reinvest the proceeds in a diversified manner. Should your gift go to a minor, it might be necessary to spread the sale out over a few years to avoid what is known as the “kiddie tax”. We recommend consulting your CPA in these circumstances.

An individual may make an annual gift of $14,000 to another person per year without it counting against theirbasic exclusion. Married couples may gift up to $28,000 per year to each child or grandchild if they so choose.Gifting above these amounts may also be done but will count against one’s lifetime basic exclusion.

Gifting A Required Minimum Distribution (“RMD”)

IRA owners who are required to take distributions each year may gift to satisfy their RMD requirement. Distributions from IRA accounts are treated as ordinary income. If you are over the age of 70 ½ and are required to make a distribution but do not need the income for living expenses, you may meet some or all of your distribution requirement by gifting the RMD instead. While you will not be able to take a charitable deduction using this form of gifting, you may be able to avoid paying ordinary income tax on the distribution.

It is worth noting that this provision was allowed in 2013 but expired January 1 and still has yet to be officially extended. While Congress is expected to extend this provision before year-end, investors interested in taking this route should wait for the green light from Washington before taking action. This is potentially an intriguing option for those investors who do not need the required distribution for living expenses, but unfortunately its availability may be on a year-to-year basis. 

How Opus Can Help

If you are preparing to make monetary gifts by year-end, give us a call and we will analyze whether gifting financial assets would be a more advantageous route than writing a check. We will also help identify the optimal stocks or funds to gift. You provide the amount and the charity or non-profit association (along with contact information) and we will take care of the rest.

We can also help facilitate gifts to family members or other individuals. This can be done either through a directtransfer to their current custodian or by establishing a new custody account.

As always, please feel free to call us at (513) 621-6787 for more information or to discuss the idea of gifting in more detail. Best wishes for a very festive holiday season and a happy New Year!

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Adam T. Eagleston, CFA
  Adam T. Eagleston, CFA
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