Give At The Right Time
Even with the volatility of 2022, the S&P 500 has gained more than 400% since the bottom in 2009. Situations where a client has a forced capital gains event—when the advisor rebalances, for example—are excellent opportunities to maximize tax deductions.
“You may have heard from some clients earlier in the year who wanted to take some risk off the table, and maybe you’ve already done some rebalancing and forced the capital gain on your clients. Here we are in the fourth quarter, it’s time to address it,” Carpenter said. “They may or may not have some loss carry-forwards from previous years. If they don’t, you’ll have de-risked the portfolio and created a tax issue.”
Yambor said that rebalancing this year has been different than other years, as equities and fixed income both have dropped—at times by the same amount—and traditional rebalancing hasn’t been useful.
“So many clients had these more growthy name stocks that have done so well, they were looking to de-risk the portfolio and rotate into value names,” he said. “And they’re looking for opportunities now to generate some charitable deductions to offset those gains from rebalancing and improving the quality of their portfolio earlier in the year.”
Divest Privately Held Investments With DAFs
Donor-advised funds (DAFs) are a suitable repository for that broad category of complex investments that cannot immediately be sold on a public market. These could be private company stock, S Corp or C Corp shares, limited partnership shares, but also could include bitcoin or restricted shares of public stock, insurance interests, annuities, life insurance policies, and oil and gas interests, the panelists said.
“Why donate these complex assets? No question about it, these assets are often the most appreciated, lowest basis shares of anything a client might own,” Carpenter said.
If a client donates these assets directly to a private foundation (theirs or someone else’s), their tax deduction will be their cost basis, which could be extremely low. To earn a fair market tax deduction, the client can donate the asset first to a DAF. The DAF would then make the donation to the foundation.
Offset A High-Income Year
The strategy of bunching several years of contributions into one year to maximize a tax deduction is one that never gets old, Kelly said.
For example, a married couple filing jointly in a 35% income tax bracket could take a $25,900 standard deduction this year. If they owned a house and itemized, they could qualify for $10,000 in a SALT deduction and a hypothetical $6,000 in mortgage interest. If they made a $10,000 charitable donation, that would put them over the standard deduction by $100, saving them $35.
If the couple knows they want to make the same donation in the next two years, they can bunch all of those charitable donations into one year for a total of $30,000.
“Instead of giving $10,000 this year, they can give $30,000. That pushes them $20,000 over the standard deduction, and that will give them a $7,000 savings,” Kelly said. “That’s fantastic when you compare that to the $105 they’d save if they spread it out over three years."
Tried And True Roth Conversions
One obstacle to clients embracing Roth conversions is often the tax bill that goes along with it, Kelly said.
“Charitably inclined clients can make a donation to offset that big tax bill, and that’s an absolute no-brainer,” Kelly said.
For example, if a client converts a $500,000 traditional IRA to a Roth, there would be an IRS tax bill of $185,000. However, if the client makes the conversation at the same time as she makes a $100,000 donation, it reduces the tax bill to $148,000.
“This isn’t going to reduce the cost dollar for dollar, but it is the easiest tax planning strategy for them to take advantage of when doing a Roth conversion,” Kelly said.