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Slash Taxes While Conserving Cash Using Donor-Advised Funds

Stock values surged in 2013, with the S&P 500 up over 30%. As it now stands, the S&P is up more than 177% from its low reached during the financial crisis in March of 2009. As a result, many doctors with personal investments in stocks have significant appreciation.

Meanwhile, upper income doctors are facing higher income and capital tax rates in 2014. In addition, they must pay the 3.8% Medicare payroll tax on all personal investment income, including dividends and capital gains from stock sales.

These factors have made gifts of appreciated stock to charities more valuable than ever, says Bob Sytz, CPA, CFP®, President of McGill Advisors, Inc. (formerly Select Consulting, Inc.). Through donating appreciated stock, doctors receive a charitable contribution tax deduction equal to the full fair market value at the date of the gift, says Sytz. In addition, they avoid paying future capital gains taxes, and the 3.8% Medicare payroll tax, on the unrealized capital gain. Finally, doctors can take advantage of this lucrative charitable contribution income tax deduction while conserving their cash.

When reviewing his doctor-client accounts for potential stocks to gift, Sytz focuses only on winning investments that have been owned for more than one year. That’s because if the donated stock is held for one year or less, the doctor can deduct only the original cost (purchase price), not its higher current value.

Sytz reviews his doctor-clients’ winners, looking for asset classes where they’re overweighted and need to trim back anyway. Also, if they bought holdings in bits and pieces over the years, doctors should donate the specific lots that have the lowest cost basis, in order to save the greatest amount in future taxes.

Sytz cautions against donating stocks that have dropped in value. Rather, the doctor is better off selling those investments and using the capital losses to offset other capital gains. If losses exceed the gains, the doctor can deduct net losses of $3,000 a year against his practice income, and carry additional losses into the future.

In addition to making gifts of appreciated stocks to specific charities, Sytz recommends doctors consider using a donor-advised fund to boost deductions and provide greater flexibility. These rapidly growing donor-advised funds are much simpler, more efficient, and significantly less costly than private foundations, says Sytz.

Under this approach, doctors can make contributions of a higher amount of appreciated stock to a donor-advised charitable fund, such as those operated by Charles Schwab, Vanguard Group, or Fidelity Investments, and later have that organization parcel out the donations to multiple charities over a period of several months, or even years. This allows the doctor to get a larger upfront deduction in the year of the gift, while assuring that future donations will be made from the proceeds held in the donor-advised fund, rather than from his personal cash.

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