Quizmaster, Doug Hutchinson, presents his quiz for the month. Here, Doug discusses strategies for tax efficient investing.
Consider this Scenario:
Your friend Elizabeth would like to donate to her favorite charity before the end of the year. Elizabeth is debating whether to donate appreciated securities or to donate by liquidating a different security at a loss (and realizing a tax benefit by doing so) and then donating the proceeds from the sale of that security.
She owns $2,000 worth of ticker ABC at a cost basis of $1,500. She purchased this investment over a year ago. Assume that the appreciated stock is fully deductible.
She owns $2,000 worth of ticker XYZ at a cost basis of $2,200. She has $200 in realized short-term gains from a different investment.
Assume she has an income tax rate of 30% and a long term capital gains rate of 15%.
What is the most tax efficient option to donate $2,000 to her favorite charity?
Solution:
For ticker ABC, she is able to receive an income tax deduction for the market value of the stock and capital gains on the stock are avoided.
Ordinary Income tax saving = $2,000 x 30% = $600
Capital gains tax savings = $500 x 15% = $75
Net Tax Savings for ticker ABC = $600 + $75 = $675
For ticker XYZ, she is able to receive an income tax deduction for the market value of the stock and generate a tax benefit by using the loss to offset $200 in realized short-term gains which would be taxed at 30%.
Ordinary income tax saving = $2,000 x 30% = $600
Tax benefit from offsetting the realized short-term gain = $200 x 30% = $60
Net Tax Savings for ticker XYZ = $600 + $60 = $660
In this particular scenario it probably makes the most sense for Elizabeth to donate her appreciated stock (ticker ABC) to her favorite charity.
Check out another quiz from Doug's Quiz Corner!
To learn more about tax efficent investing or to discuss your strategy give us a call at 1-800-541-7774 or contact us here to get in touch with one of our Wealth Managers.
This quiz is intended for informational and illustrative purposes only. This material is not intended to be relied on as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information presented is general information that does not take into account your individual circumstances, financial situation or needs, nor does it present a personalized recommendation to you. The information and opinions contained in this material are derived from sources deemed reliable, are not all-inclusive and are not guaranteed as to accuracy.
