Creative Options For Your Highly Appreciated Procter & Gamble Stock.
As the end of the year approaches, this is a good time to think about what you can do with your highly appreciated Procter & Gamble stock.
Many Procter & Gamble employees and retirees have highly appreciated P&G stock sitting around. Whether in your SIP accounts, in a safe deposit box or under the bed, you need to make sound decisions concerning your options with this stock.
This stock most likely has a low-cost basis and its appreciation will be subject to capital gains taxes if you sell the stock. Let’s look at some ways to maximize your use of this valuable asset.
1. Donate Your Stock to Charity.
One of the best uses of appreciated stock is to donate it to a qualified charity. When you give stock to a charity, you are eligible for a current year tax deduction for the Fair Market Value (FMV) of the stock. Fair market value is simply a technical way of saying “what the stock is worth today.”
If you donate $10,000 worth of stock with a cost basis of $2,000, you are eligible for a tax deduction of $10,000 and the charity gets the entire gift. If instead, you sold the stock and gifted the after-tax proceeds, you could pay 15% to 20% taxes on the gain (plus state income taxes in many states). The charity gets a reduced gift, and you get a reduced tax deduction.
2. Set-up a Donor-Advised Charitable Fund.
What if you are in an extremely high tax bracket this year? Your career is going well, and maybe you have some company stock options that came due. In this case, it might make sense to set up a donor-advised fund. With a donor-advised fund, you can gift substantially more stock than you are inclined to give to a charity in any one year.
For example, you want to give $10,000 to your favorite charity every year for the next five years. With a donor-advised fund, you can contribute the entire $50,000 worth of stock this year which makes you eligible for a current year deduction of $50,000. You can then make the $10,000 gifts from the donor-advised fund every year for the next five years. You can use this strategy with much more than $50,000 if you are so inclined.
3. Gift Your Stock to Children or Grandchildren.
Does charity begin at home? Your children and grandchildren may be excellent options to gift highly appreciated stock. If your children and grandchildren’s income level is substantially below yours, they can sell the stock that has been gifted to them and pays taxes on the appreciation at their income tax bracket instead of yours.
Capital gains tax brackets are currently 0% of people in the 15% tax bracket ($75,300 AGI for a couple in 2016), 15% for individuals in the 25% to 35% tax bracket (up to $466,900 AGI for a couple in 2016) and 20% for couple who earns more than that amount. Depending on your current tax bracket and the children and grandchildren’s brackets, you can avoid taxes of 15% or 20% on the appreciation.
4. Sell Your Stock then Buy It Right Back.
Let’s say your income is low this year. As mentioned above, the capital gains tax bracket for a couple with an AGI of $75,300 or less is 0%. Add back the $12,600 standard deduction and the two $4,050 personal deductions; your gross income needs to be below $96,000 for a married couple filing jointly.
Why not sell some shares of your P&G stock and then turn around and repurchase them? Doing so will give you a step up in basis on those shares. What does that mean? If you sell those shares in the future when your income is higher, you will only owe taxes on the appreciation of the P&G stock from today forward. If you gift this stock to your children or grandchildren, they will have no taxes due when they sell the stock (as long as there is no change in the value from the time you bought back the stock till the time they sold it).
This can have unexpected consequences. If you want to use this method, you need to have your CPA run a complete tax analysis you. While the capital gains taxes are 0%, this transaction can impact the taxes you pay on your social security income or even the amount you pay for your healthcare insurance. This method needs to be part of an overall retirement income analysis to be done properly.
5. Diversify Your Stock.
Capital gains tax rates are at historical lows right now. This site will give you a quick Historical Look at Capital Gains Rates. If you diversified $100,000 of P&G stock with a cost basis of $20,000, assuming a 15% capital gains rate, you would only owe $12,000 in federal taxes. I won’t go into the benefits of diversification in this article. If P&G stock represents an unreasonable percentage of your net worth, you really should consider diversifying.
You should always be asking yourself the question: “If I had (whatever dollar amount you are considering selling) in cash, would I invest all of that cash into P&G stock right now in light of my other investments?” If the answer is no, again, consider diversifying.
6. Hang on to Your Stock.
That’s right. If you are not overly invested in P&G stock, I think you should be comfortable holding some P&G stock. I won’t go into an analysis of P&G stock here. There are plenty of agencies and investment companies who do a good job of analyzing individual stocks for us. Personally, I like the direction P&G is taking with their reduction of brands. There are only so many issues a board of directors can address in any given work year. I think the company’s new narrower focus will lead to success down the road.
Whatever you decide to do with your highly appreciated P&G stock, make sure it fits into your overall financial plan. None of these methods can be implemented without impacting your financial plan.
This article first appeared on PersonalChoiceFinancial.com. Personal Choice Financial Advisors, LLC specializes in working with Procter & Gamble employees and retirees. All rights reserved.