The bull market that started in 2009 is now the longest in history, and Silicon Valley stocks have been among the leaders. Some have gone up by 10 times or more. But it’s rare for anything to go up forever.
Stockholders sitting on large gains who are thinking about selling will face hefty tax bills.
Let’s say you were fortunate enough to invest $10,000 into one of the valley’s high-fliers before the bull market started, and now, a decade later, it’s grown to $100,000. If you sell, your capital gain of $90,000 could be taxed by one-quarter to one-third, depending on your income level, including all federal and state taxes, and assuming it’s not held in a tax-deferred account like a 401(k) or IRA.
Is there any way to avoid that tax bill of as much as $30,000?
The first way is one that I doubt anyone would choose: If you die, your heirs can inherit your stock and get a stepped-up cost basis. To make this go smoothly might take a bit of estate planning during your lifetime, but the upshot is your heirs’ cost for tax purposes would be the value on the day you died. They sell the stock for $100,000; their cost was $100,000. That’s zero profit and zero tax bill.
Of course, no one wants to die to avoid taxes. But the stepped-up cost basis is a tremendous tax break that should be considered when deciding whether to sell or hold on.
An infinitely more appealing way to avoid the tax bill is to donate the stock. And in the wake of the new tax bill, charities are hoping that will happen.
The new tax law that went into effect this year nearly doubles the standard deduction to $12,000 for individuals and $24,000 for couples. This means fewer taxpayers will itemize their deductions, and therefore have less incentive to make charitable donations. Charities worry that they will now collect less in donations.
One way for taxpayers to preserve their writeoff for charitable donations is to bunch them into one year. For example, people who want to donate $10,000 a year to charity have less incentive to do that if they take the standard deduction. But if they can afford to make five years’ donation, or $50,000 in this example, in one year, then it makes sense for them to itemize and take a $50,000 writeoff.
They can do this using a Donor Advised Trust, an investment account offered by many financial institutions. In this example, the taxpayer donates $50,000 to the donor advised trust. The money is invested in mutual funds or other securities, and the taxpayer can dole the money out to charities over several years.
If you are the stockholder in the earlier example, you could donate your $100,000 worth of stock to the Donor Advised Trust, completely avoid the $30,000 tax bill, and get a writeoff of $100,000. The stock would be sold inside the trust, invested in other securities, then the money could be doled out to charities over several years as you choose.
Note: I am not a tax advisor. Please consult one before making major tax decisions.
- Mark Rosenberg is a financial consultant in Scotts Valley with Western International Securities, a member of FINRA and SIPC. He can be reached at 831-439-9910 or
mr********@wi*******.com
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