Written By: Sarah Nadiri
Do you have large unrealized capital gains in your after-tax (non-retirement) portfolio? The question of how to strategically plan around large, embedded capital gains has become increasingly popular. The growth of the U.S. and other global economies since The Great Financial Crisis has injected healthy gains into most asset classes in the average investor’s portfolio. Unrealized capital gains represent the price appreciation of an asset that has not yet been sold. Here are a few ideas for tax-efficiently reducing capital gain tax liability in after-tax portfolios.
Donor Advised Fund
Many of our clients enjoy giving charitably. For some, TCG has helped them establish a Donor-Advised Fund (DAF). This often makes sense for clients who itemize on their tax return most, or all, years and who have after-tax portfolios with unrealized capital gains. For example, most clients will pull out their checkbook and write a check to a local charitable organization they regularly support. Imagine if this same client contributed a highly appreciated security to their DAF, instead of writing a check. They would receive the applicable tax deduction (for the year of the contribution) to the DAF and would ultimately eliminate their capital gain tax liability in the highly appreciated security that was contributed. The client could purchase the security that was donated with the cash they would have given directly to the charitable organization. This would increase their cost basis and maintain their position in that same holding.
Whether contributing a highly appreciated security to a DAF or contributing cash, many of our clients contribute to their DAF every other year. This is a common practice because clients do not always have enough deductions to itemize in a single year, therefore, they will make a larger contribution to the DAF in year one to itemize and maximize tax savings. Then, over the first and second year, the client recommends their DAF to make grants to qualified U.S. public charities of their choice. This allows for a large tax deduction in year one, but also creates a two-year period of steady and predictable charitable giving to the organization.
It’s important to speak with your tax advisor and financial advisor before opening a DAF, as there may be a better strategy for your situation.
The pandemic prompted a market downturn in 2020 and the ensuing volatility has certainly caused some discomfort for many of our clients with substantial financial assets in the market. During these tense moments, and as a regular practice, TCG is busy in the background completing tax-loss harvesting trades. This benefits our clients with after-tax portfolios because our portfolio management team can sell securities at a loss. We then invest the proceeds in other suitable securities to avoid wash sales. After 31 days we buy back the same securities that were sold at a loss to reposition the client in the same holdings and at their target asset allocation. This process locks in realized capital losses that can be used to offset realized capital gains or capital gains distributions in the current year or in a future year.
If this interests you, make sure to call your advisor so they can look for potential opportunities. This is especially helpful if you own appreciated positions that you want to get out of or trim.
Did you know gifting highly appreciated securities rather than cash to relatives can help the donor to avoid capital gains tax on the gifted security? In the right situation, our clients enjoy regularly gifting cash to their children or grandchildren. For many of them, it often makes sense to gift highly appreciated securities rather than gifting cash. This transfers the capital gain tax liability when the security is sold from the donor to the donee. The donee may likely be in a lower marginal tax bracket and, therefore, pay lower capital gains tax rates. Many of our clients will “gross up” the amount of their gifts to help the donee pay the tax liability.
It’s important to discuss family gifting strategies with your tax advisor, your financial advisor, and often your estate planning attorney, as there are important tax and estate considerations when developing the right gifting program for your family. For more strategies on planning around large, embedded capital gains, make an appointment today at tcgservices.com/snadiri/
Senior Wealth Advisor
Sarah Nadiri is a Senior Wealth Advisor who offers custom financial planning and investment management services to her clients in the Greater Fresno area. She believes every person deserves clear and meaningful financial solutions, delivered in easily understood terms. As an advisor at TCG, a fiduciary and fee-only registered investment advisor, Sarah’s core value is to remain a responsible steward of her client’s financial assets.
Sarah graduated Cum Laude from California State University, Monterey Bay in 2014 with a Bachelor’s degree in Human Communication. She kicked off her financial services career while living in New York City, where she worked for a large life insurance company and broker dealer. Throughout her 5 years of practicing financial planning and investment management, Sarah has helped dozens of clients to reduce their management fees, improve their tax strategies, and implement productive financial plans. With her forward-thinking approach, Sarah’s investment and service expertise has resulted in greater financial security for her clients in New York City, San Francisco, and now in her hometown of Fresno.
Sarah and her husband, Ashkan Nadiri, are avid outdoor adventure seekers. When Sarah isn’t helping clients, she and Ashkan can be found hiking the foothills of Fresno, paddle boarding the South Lake Tahoe waters, or backpacking the mountains of Big Sur. Originally from Fresno, Sarah can also be found volunteering or fundraising for local community organizations like the Holy Cross Center for Women and Saint Agnes Medical Center.
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