Atlantic Capital Management

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Friday, 11 July 2014 00:00

Donating Highly Appreciated Stock

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It can give you a tax break. It can give a charity a tax break in the future. 

 

Why sell shares when you can gift them? If you have appreciated stocks in your portfolio (and you hold them in a non-qualified account that doesn’t get special tax treatment), then you might want to consider donating those shares to charity rather than selling them someday.   

Why, exactly? Donating appreciated securities to a tax-exempt charity can result in a pair of tax breaks. If you have held the stock for more than a year, you can deduct the fair market value of the stock in the year that you make the donation. If the charity is tax-exempt, it won’t face capital gains tax on the stock if it sells it in the future. Again, this is all provided you donate the shares to the charity out of a non-retirement account (and not out of a qualified retirement plan such as an IRA).1 

When is donating stock a better choice than gifting cash or just selling the shares? Two reasons may motivate you to donate highly appreciated stock to a tax-exempt charity. One, if you own too much company stock or your portfolio isn’t very diverse, it can give you a chance to reduce overweighting in one stock or sector. Two, it might be a smart tax move if you own a number of low-basis stocks. 

If you just hand some cash to the tax-exempt charity, the tax benefit is certainly significant. Cash gifts are deductible up to 50% of AGI, and that lowers their net cost for a donor. As an example, if a donor in the 35% tax bracket gives a 501(c)(3) non-profit organization a gift of $5,000, the net cost can work out to just $3,250 with $1,750 realized in tax savings.2 

If you donate highly appreciated securities that you have owned for at least one year, the tax benefit can be even more significant. You can deduct the full fair market value of the securities (up to 30% of your AGI) and the unrealized gains won’t be taxed either. So the more the stock appreciates, the greater the potential capital gains tax break down the road.2 

If you sell shares of appreciated stock from a taxable account and subsequently donate the proceeds from the sale to charity, then you face capital gains tax on the gain you realize, which effectively trims the tax benefit of a cash donation.3 

If you donate shares of depreciated stock from a taxable account to a charity, you can only deduct their current value, not the value they had when you originally bought them – so there is far less merit in doing that.3 

Remember the federal tax rules for charitable donations. If you donate highly appreciated stock to a charity, make sure to abide by the rules set down in IRS Publication 526, Charitable Contributions. Double-check to see that the charity has legitimate non-profit status under federal tax law, and be sure to record the deduction on a Schedule A that you attach to your 1040.4,5 

If your contribution totals $250 or more, the donation(s) must be recorded – that is, the charity needs to give you a written statement describing the donation and its value and whether it is providing you with goods or services in exchange for it. (A bank record or even payroll deduction records can also denote the contribution.) If your total deduction for all noncash contributions in a tax year exceeds $500, then complete and attach Form 8283 (Noncash Charitable Contributions) to your 1040 when filing. If you donate more than $5,000 of property to a charity, you will need to provide a letter from a qualified appraiser to the charity (and by extension, the IRS) stating the monetary value of the gift(s).4,5       

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.  

Citations.

1 - raymondjames.com/thorsenwealthmanagement/pdfs/charity_article.pdf. [10/12/12]

2 - purdue.edu/giving/fed_tax.html [6/10/14]

3 - money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2013/09/26/how-to-give-stock-to-charity-2 [9/26/13]

4 - today.com/money/charitable-giving-how-you-can-donate-cause-benefit-tax-time-2D79751463 [6/3/14]

5 - irs.gov/uac/Eight-Tips-for-Deducting-Charitable-Contributions [11/4/13]

Thursday, 19 June 2014 00:00

Rising Interest Rates

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How might they affect investments, housing & retirees?

How will Wall Street fare if interest rates climb back to historic norms? Rising interest rates could certainly impact investments, the real estate market and the overall economy – but their influence might not be as negative as some perceive.  

Why are rates rising? You can cite three factors. The Federal Reserve is gradually reducing its monthly asset purchases. As that has happened, inflation expectations have grown, and perception can often become reality on Main Street and Wall Street. In addition, the economy has gained momentum, and interest rates tend to rise in better times.

The federal funds rate has been in the 0.0%-0.25% range since December 2008. Historically, it has averaged about 4%. It was at 4.25% when the recession hit in late 2007. Short-term fluctuations have also been the norm for the key interest rate. It was at 1.00% in June 2003 compared to 6.5% in May 2000. In December 1991, it was at 4.00% – but just 17 months earlier, it had been at 8.00%. Rates will rise, fall and rise again; what may happen as they rise?1,2

The effect on investments. Last September, an investment strategist named Rob Brown wrote an article for Financial Advisor Magazine noting how well stocks have performed as rates rise. Brown studied the 30 economic expansions that have occurred in the United States since 1865 (excepting our current one). He pinpointed a 10-month window within each expansion that saw the greatest gains in interest rates (referencing then-current yields on the 10-year Treasury). The median return on the S&P 500 for all of these 10-month windows was 7.93% and the index returned positive in 80% of these 10-month periods. Looking at such 10-month windows since 1919, the S&P’s median return was even better at 11.50% – and the index gained in 81% of said intervals.3 

Lastly, Brown looked at the S&P 500’s return in the 12-month periods ending on October 31, 1994 and May 31, 2004. In the first 12-month stretch, the interest rate on the 10-year note rose 2.38% to 7.81% while the S&P gained only 3.87%. Across the 12 months ending on May 31, 2004, however, the index rose 18.33% even as the 10-year Treasury yield rose 1.29% to 4.66%.3  

The effect on the housing market. Do costlier mortgages discourage home sales? Recent data backs up that presumption. Existing home sales were up 1.3% for April, but that was the first monthly gain recorded by the National Association of Realtors for 2014. Year-over-year, the decline was 6.8%. On the other hand, when the economy improves the labor market typically improves as well, and more hiring means less unemployment. Unemployment is an impediment to home sales; lessen it, and more homes might move even as mortgages grow more expensive.4 

When the economy is well, home prices have every reason to appreciate even if interest rates go up. NAR says the median sale price of an existing home rose 5.2% in the past year – not the double-digit appreciation seen in 2013, but not bad. Cash buyers don’t care about interest rates, and according to RealtyTrac, 43% of buyers in Q1 bought without mortgages.4,5

Rates might not climb as fast as some think. Federal Reserve Bank of New York President William Dudley – whose voting in Fed policy meetings tends to correspond with that of Janet Yellen – thinks that the federal funds rate will stay below its historic average for some time. Why? In a May 20 speech, he noted three reasons. One, baby boomers are retiring, which implies less potential for economic growth across the next decade. Two, banks are asked to keep higher capital ratios these days, and that implies lower bank profits and less lending as more money is being held in reserves. Three, he believes households and businesses are still traumatized by the memory of the Great Recession. Many are reluctant to invest and spend, especially with college loan debt so endemic and the housing sector possibly cooling off.6  

Emerging markets in particular may have been soothed by recent comments from Dudley and other Fed officials. They have seen less volatility this spring than in previous months, and the MSCI Emerging Markets index has outperformed the S&P 500 so far this year.2    

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

    

Citations.

1 - newyorkfed.org/markets/statistics/dlyrates/fedrate.html [5/22/14]

2 - reuters.com/article/2014/05/21/saft-on-wealth-idUSL1N0NZ1GM20140521 [5/21/14]

3 - fa-mag.com/news/what-happens-to-stocks-when-interest-rates-rise-15468.html [9/17/13]

4 - marketwatch.com/story/existing-home-sales-fastest-in-four-months-2014-05-22 [5/22/14]

5 - marketwatch.com/story/43-of-2014-home-buyers-paid-all-cash-2014-05-08 [5/8/14]  

6 - money.cnn.com/2014/05/20/investing/fed-low-interest-rates-dudley/index.html [5/20/14]

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