Tax-Efficient Giving By Lewis J. Walker, CFP(R)

Around April 15th, diligent savers and successful career and business builders realize how big a partner Uncle Sam is in financial outcomes.

A gentleman invested a small amount of money in a privately held company before the enterprise went public in 1983. After 33 years he still owns stock in the now New York Stock Exchange listed company. Given many stock splits he owns a large block of shares with a value exceeding a million dollars. Annual dividends of $19,000 are a supplement to retirement cash flow. Asked if he would consider selling some of the stock, he said paying the capital gains tax would be too painful. “I’d rather keep it and at my death pass it to my wife or kids and let ‘stepped up basis’ wipe out the tax liability.” When politicians proclaim “tax rates don’t matter,” don’t believe it. They matter!

Suppose you invested in a start up company or a privately held concern, say for $1 a share of stock. Now the stock is a well recognized public company and your stock is worth $50 per share. The tax basis is $1 a share; the taxable long term capital gain is $49 per share. Ouch! What now?

The wife owned a significant block of very low basis stock in a major company. Her husband was in failing health. She gifted the stock to him. He died two years later and via his will passed the stock back to her. She inherited the stock with stepped up basis. In other words, her tax basis now was the value at date of death, not what had been paid for the stock initially. Note: if the deceased dies within one year, the tax basis reverts back to that of the donor.

A top tax rate of 15% applies to qualified dividends and the sale of most appreciated assets held over one year for single filers with taxable income up to $415,050; $466,950, married filing jointly. Long-term capital gains or qualified dividend income over that threshold are taxed at a marginal rate of 20%. Gains on collectibles (coins, precious metals) are taxed at 28%. Depreciation recapture on real estate or other assets is taxed at 25%.

Taxation does not stop there. Under 2013 healthcare legislation, a 3.8% Medicare surtax applies to net investment income for taxpayers with adjusted gross income (AGI) over $200,000 (single filers) or $250,000 (married filing jointly). State income taxes add to the pain! Entrepreneurs selling companies, investors cashing out of blocks of stock, or sellers of low tax basis real estate, definitely need tax advice from a sharp CPA given tax bites that could approach 40%.

A person could gift stock to an adult child or a minor child via a trust. A child is away at college. Mom or dad could gift stock and he or she could sell it and pay little or no taxes given their lack of income. But beware of the kiddie tax. If a child is under age 18 or a full-time student under age 24, anything over $1,900 in investment income is taxed at the parent’s rate. The tax code is full of zingers like that so check with tax counsel before making a move!

With donations to religious institutions or other charities, you might gift low tax basis stock in lieu of cash. It is inefficient to sell stock, pay a capital gains tax, and then gift the cash. Last minute legislation passed in 2015 made permanent rules applied to Qualified Charitable Deductions (QDCs) for those over age 70 1/2. You may gift up to $100,000 of tax-deferred IRA savings to a charity. That’s better than taking the money out of the IRA, paying taxes at ordinary income rates, and then taking a charitable deduction. The latter could increase taxes on Social Security income; Medicare insurance premiums could increase; Adjusted Gross Income limitations on itemized deductions could apply. For those over 70 ½, QDCs satisfy Required Minimum Distributions (RMDs) for the year. That can benefit the charitably-oriented IRA owner who doesn’t need distributions to live on.

As an owner of land with significant development potential, or with important natural, agricultural, and historic resources, a donor of land into a conservation easement can take a tax deduction up to 50% of AGI, with a carry-forward up to 15 years. Qualifying farmers and ranchers can deduct up to 100% of AGI. Ted Turner has used these rules to great advantage.

This column should not be taken as tax or legal advice. Consult with qualified legal and tax counsel on all estate planning and tax matters.

Winston Churchill said, “We make a living by what we get. We make a life by what we give.” Saving taxes along the way is a welcome bonus!

Lewis Walker is President of Walker Capital Management, LLC. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Walker Capital Management, LLC.