How To Avoid Higher Taxes On Appreciated Securities

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One retirement planning strategy is to sell assets and use the proceeds for spending money. But under new rules, gains can trigger higher taxes and lower deductions.

And those with moderate incomes also can feel the bite, if they make a large profit on a sale.

But there's a way you can cut or avoid higher taxes, boosting your retirement cash flow while supporting a worthy cause.

Take a hypothetically retired Jim Hill, whose annual income is around $450,000. Hill plans to sell securities that he has held for many years. His long-term cap gain will be around $500,000.

That sale will be subject to the new 20% tax rate on such gains. He'll also owe the 3.8% Medicare surtax and his state's income tax.

And Hill will lose some of the tax benefits of his itemized deductions, which phase out at various income levels. Altogether, he might owe 30% of his gain in tax, leaving him much less to reinvest.

So instead Hill uses his appreciated securities to fund a charitable gift annuity ( CGA ). Many charities, schools and nonprofits will do the setup at no charge.

Hill's cost to do this is zero or just an hour of his adviser's time to review the paperwork. Many big charities accept CGAs as small as $5,000.

You can use assets such as real estate and securities to fund a CGA. You can also use cash.

In return for your donation, the charity pays you an annuity. You can choose the term of the annuity.

Many donors specify a lifetime annuity. This can be for their own life or for two lives, including a spouse.

Charities often base their payout rates on tables from the American Council on Gift Annuities. These tables, revised periodically, cover either one or two lives.

The older you are when you make a donation, the greater your payout will be. A 60-year-old donor will get 4.4% a year for life, on the ACGA table. That would be $26,400 each year on a $600,000 contribution, for example. A 70-year-old would get 5.1%.

Spousal Benefit

Adding a spouse reduces the size of each payout, but is likely to extend the number of years payouts are made. A couple ages 60 and 55 would get 3.7% a year, for example, as long as either is alive. A couple age 70 and 65 would get 4.4%.

In today's low-yield environment, getting 4% or 5% a year is much better than getting next to nothing from a bank account or a money market fund.

And you'll get that cash flow based on the full value of the donated assets. If you keep the assets and sell them, you might have only 70 or 80 cents on the dollar to reinvest for retirement income, after tax.

On the other hand, using a CGA means tapping your principal for spending money. The relinquished assets won't go to your heirs.

So a CGA may work best for people who have other assets to leave any loved ones.

CGAs offer additional advantages too. The money you donate can benefit your favorite cause, which can use the proceeds right away.

You can get recognition. You can also get an upfront tax deduction, based on the value of the donated assets, minus the present value of the annuity you get.

A 60-year-old donating $600,000, for example, would get a deduction of about $100,000.

And the income you receive from your contribution will be part taxable, part tax-free as a return of your principal. Some of the taxable portion will be favorably taxed as long-term cap gains, if you fund your CGA with appreciated assets held more than one year.

So using a CGA can spread the taxable gain over your lifetime. Reporting a smaller amount of income each year, you can cut or avoid the new taxes on high incomes.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Mutual Funds

Referenced Stocks: CGA

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