Can charitable deductions reduce short-term capital gains?

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Topic Author
redstar
Posts: 98
Joined: Thu Jul 13, 2017 11:15 pm

Can charitable deductions reduce short-term capital gains?

Post by redstar »

Hi all, I have a tax question I am a bit puzzled by. If I have ordinary income at a 25% marginal rate, long-term gains at a 15% rate, and short-term gains at a 33% rate, which income will deductions offset first? If I make a charitable deduction, will it just all apply to ordinary income, therefore moving my marginal income rate down, or would it apply to short-term capital gains, therefore "saving" the 33% in taxes?

(I realize the correct answer is to avoid capital gains).
livesoft
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Re: Can charitable deductions reduce short-term capital gains?

Post by livesoft »

Another way to ask this is: "What happens if I increase my itemized deductions?"

The answer is that your AGI does not change, but your taxable income changes even though your LT capital gains do not change.

Can I ask a question back at you? How can you have ordinary income at 25% and short-term capital gains at 33%?
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Topic Author
redstar
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Joined: Thu Jul 13, 2017 11:15 pm

Re: Can charitable deductions reduce short-term capital gains?

Post by redstar »

livesoft wrote: Sun Dec 17, 2017 1:59 pm Can I ask a question back at you? How can you have ordinary income at 25% and short-term capital gains at 33%?
Hm, it's possible I misunderstand the intersection of LT and ST capital gains so please correct me if I am wrong. My ordinary income is in the 25% bracket. My LT gains push my total income into what would be the 33% bracket, but of course is taxed at 15%. Then, ST gains are stacked on top of that. Because ordinary income + LT gains put me in the 33% bracket, that is what the ST gains are taxed at.

Is this incorrect?
kaneohe
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Re: Can charitable deductions reduce short-term capital gains?

Post by kaneohe »

QDIV/LTCG are stacked on top of the ordinary income (of which ST is a part) so your ST gains would be taxed at whatever rate your other ordinary income + STCG resulted in. It might be useful to use tax software or a tax calculator to calculate tax w/ normal ord. inc. + LTCG ; and then add
the STCG. Depending on the mix of the different components, sometimes you can get surprised by the marginal tax rate.
kaneohe
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Re: Can charitable deductions reduce short-term capital gains?

Post by kaneohe »

see tfb's chart on 12/11/11 for a pictorial way of thinking about this.
viewtopic.php?t=86849

You'll have to create the other brackets (28, 33%). The STCG is a part of the ordinary income bar at the bottom. The charitable deductions will
eat away at the bottom of the ordinary income bar and lower that bar so that the top rate on the bar depends on which bracket it ends up in.
If the deduction is large enough , it could lower the ordinary income bracket.
Topic Author
redstar
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Joined: Thu Jul 13, 2017 11:15 pm

Re: Can charitable deductions reduce short-term capital gains?

Post by redstar »

Thank you for clearing that up, I have been thinking about STCG all wrong!
StealthRabbit
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Joined: Sat Jun 13, 2009 1:25 am

Re: Can charitable deductions reduce short-term capital gains?

Post by StealthRabbit »

right answer above...
'it depends'... (as you follow the rules above)

What is your STCG from?

If stocks / securities (not yet sold), I found it advantageous to gift my STCG stocks direct (in kind) to my Donor Advised Fund (DAF) (or family foundation), which in turn transfers tax free with a 'step-up' basis. (I.e. you get to deduct the full current market value, and your charity gets the full value, essentially the STCG is avoided. (DAF / Family Foundation is your own fund... but for exclusive gifting purpose)

Fidelity and Vanguard (and I'm sure most other groups), as well as your Community Foundation offers this excellent tax planning tool. Be careful, my Community Foundation went off course and were not gifting per my instruction and had some less than stellar investment results, and higher expenses... So... I departed their management and now I manage my own fund and investment mix through Vanguard Charitable. Very ez to grant distributions (periodic and one-time).

I have been using this tool since in my 30's and it grew rapidly via company stock disbursements.
kaneohe
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Re: Can charitable deductions reduce short-term capital gains?

Post by kaneohe »

StealthRabbit wrote: Sun Dec 17, 2017 10:02 pm ...........................

What is your STCG from?

If stocks / securities (not yet sold), I found it advantageous to gift my STCG stocks direct (in kind) to my Donor Advised Fund (DAF) (or family foundation), which in turn transfers tax free with a 'step-up' basis. (I.e. you get to deduct the full current market value, and your charity gets the full value, essentially the STCG is avoided. (DAF / Family Foundation is your own fund... but for exclusive gifting purpose)

.............................................................
Is this really true that you get to deduct the full market value for ST stocks donated to DAF? This and similar articles https://www.kiplinger.com/article/taxes ... arity.html suggest that if you donate ST stocks to charity, you can only deduct the basis..........they don't discuss this directly about donating to DAF.
kaneohe
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Re: Can charitable deductions reduce short-term capital gains?

Post by kaneohe »

https://www.schwab.com/resource-center/ ... cmp=em-QYB

suggests more directly that donation to DAF also must meet the 1 yr holding period for fair market value deduction.
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