The holidays are just around the corner… A time to enjoy spending time with family, eating great food, and a time to focus on generosity.
As we get close to wrapping up the year, it’s also time to start thinking about your 2021 tax liabilities and what to do with your investment gains.
Today I’m sharing a strategy that can help you be more generous this holiday season, while also being more efficient with your capital and minimizing your tax expense.
It’s a legitimate strategy designed to encourage all of us to support the causes and charities that are most important to us. I think you’ll appreciate the perspective and would love to know what you think about this idea! (Please comment below – or on the actual YouTube video.)
Holiday Giving Video Notes
- The market has been strong this year with stocks near all time highs.
- Investors have positions with large unrealized gains.
- That’s both good (we love to have profits) and bad (we will have to pay taxes).
- Today, I want to show you a holiday giving trick to reduce your taxes.
- This lets your holiday giving do more good — allowing you to be more generous.
First, let’s talk about the bad news…
- How much tax will you owe? Well it depends on a number of things…
- Long-term versus short-term — have you held your positions for more than a year?
- If more than a year, max Federal tax rate is 20%
- If less than a year, gains are taxed as ordinary income (the rate can be much higher).
- Depending on where you live, you may also have state tax on top.
- If you decide to sell your shares to free up cash for your gift, you could have a big tax bill.
- That leaves less cash left over for holiday giving!
Fortunately, there’s good news…
- If giving to a non-profit charity you can deduct your gift’s value from your taxable income.
- If you give shares of stock, you can deduct the value of your shares.
- This way you don’t have to pay a capital gains tax on your profits.
- Most charities have brokerage accounts and you can transfer your position to them.
- You can then write off the entire value of the stock gift.
- As a non-profit organization, your charity won’t have to pay taxes on the gift.
A Holiday Giving Example
- Assume you have a position with a 100% gain, and using it for a $5,000 gift.
- The market has more than doubled from pandemic lows. Many have big unrealized gains.
- If you sell first, you would need to pay taxes on $2,500 of this gain.
- If you live in a high-tax state, your total tax rate for this income could easily be 30%
- So $750 of your proceeds could go to taxes — leaving you with $4,250 to give.
- You’ll then be able to deduct the $4,250 donation from your taxable income.
What if you transferred the shares?
- This way you don’t pay tax on the gain and the charity can receive the full $5k
- Also, you’ll be able to deduct $5k from your taxable income.
- You’ll save more on your tax bill allowing you to be even MORE generous next year.
Give to Caesar…
- Paying taxes is part of our civic duty. So follow the rules and be honest.
- But making wise moves with your investments — and your taxes — is important.
- This way, more of your holiday giving can go to the causes most important to you.
- Be sure to check with your tax accountant for any limits or special considerations.
- If you have big profits from this year’s market, I encourage you to be generous!