Liquid assets are comprised of cash, checks, savings accounts, certificates of deposit (CD), money market funds, Treasury bills and appreciated securities such as publicly traded stocks, bonds and mutual funds. Securities are valuable assets that can realize substantial capital gains as they appreciate in value. When deciding on gifting securities, consideration needs to be given to the original cost (cost basis) of the securities in relation to their present value (market value). The cost basis is the acquisition price, reduced by depreciation deductions and increased by improvements. When securities have increased in value, it is much more beneficial to a giver to transfer the securities to WaterStone rather than selling them. With careful planning, givers can reduce or avoid the capital gains tax while receiving a tax deduction for their charitable giving.
When WaterStone receives a gift of appreciated securities that have been held long term (more than one year), the gift qualifies for a charitable tax deduction based on the full market value, not just the original cost. Gifts of securities are deductible in amounts up to 30% of Adjusted Gross Income (AGI) in a given tax year. If the entire deduction is not met in the year of the gift, excess deductions can be carried forward for five additional years. When making a gift in this manner instead of selling the gifted securities, all capital gains taxes are avoided. These taxes are generally charged at a 15% rate.
If the giver wishes to hold a particular portfolio of securities personally but also benefit from the tax advantages of gifting appreciate assets, the securities may be transferred to WaterStone and identical securities repurchased with cash through his own broker. This yields an immediate income tax deduction, capital gains tax advantages, plus a new, higher basis in his favored equity position.
If securities are reflecting losses, a giver should sell them to realize both the loss and the tax deduction. Then, a charitable deduction can be generated by gifting cash proceeds of the sale to WaterStone.
Giver gives WaterStone 1,000 shares of a publicly traded stock he has held for more than a year. The shares are currently trading at $20, producing a fair market value of $20,000. The original cost of the shares is $12,000. Assuming the giver’s income tax rate is 28%, the gift will avoid $1,200 in capital gains taxes ($8,000×15% capital gains tax rate) and $ 5,600 in income taxes ($20,000×28%) if sold outright. The total tax savings of $6,800 is more than half the giver’s net cost of $12,000 and the giver is able to make a gift of $20,000 to WaterStone.