Donation bunching when donating appreciated stock

[The Cosmic Avenger]

I finally opened a donor-advised fund this year, and my current strategy is to donate all appreciated stock. I inherited some stock and funds that have appreciated a fair amount, and I might as well save us the capital gains tax. Other than this strategy, I wasn't planning on changing our charitable giving. Let's say for the sake of this discussion we give about $10K a year, to a few dozen charities. So my plan is to put $10K of appreciated stock into the DAF, then repurchase that stock, thus resetting our cost basis. We're spending $10K out of checking, basically, to purchase that stock when otherwise we'd be using it for charitable giving, so that's a wash.

Now, I see the advantages of bunching, especially with the new standard deduction. However, my plan to repurchase stock doesn't work with bunching, as we set aside $10K per year for charitable giving, so that extra $20K in stock would not be repurchased right away.

Should I just bunch next year, and spread the $30K stock repurchase over 3 years? These are steady, large cap stocks that will probably be more expensive in years 2 and 3, and that grates on me. I feel like I might lose more than I would gain in tax savings by bunching. And as we know, there's no way to reliably estimate a stock's appreciation or everyone would be able to guarantee returns! Should I review the last three years performance for the stocks in question and see how I would have made out if I had bunched 3 years ago? That seems....irrelevant.

So, do you all think bunching is a good strategy or not if my overall strategy is to keep my taxable investments and reset their cost basis?

 

[RunningBum]

Bunching is usually a good idea if you will be itemizing some years, and not others.

Are there other investments you could sell and use to buy your stocks back immediately, and then over the 3 years buy back those investments?

 

[The Cosmic Avenger]

Bunching is usually a good idea if you will be itemizing some years, and not others.

Right, that's something I'm considering, but right now my primary strategy with the DAF is to reset the cost basis of our taxable investments.

Are there other investments you could sell and use to buy your stocks back immediately, and then over the 3 years buy back those investments?

I'm not clear, but maybe I didn't explain. We normally have, say, $10K in cash available to donate. Now I'm passing that through by donating $10K in my most appreciated stock and buying it back with the cash. So bunching might cause me to lose 2 years of appreciation on whatever stock I would donate. I'm unsure of how to evaluate whether this might still be a good strategy due to the uncertainty of the stock's future value, so I am hoping for some opinions from the peanut gallery on that in particular.

 

[RunningBum]

Right, that's something I'm considering, but right now my primary strategy with the DAF is to reset the cost basis of our taxable investments.

Yes, and you also asked whether bunching is a good strategy as part of this. It is.

The standard deduction is $24K for MFJ. Suppose you have $15K in deductions, plus $10K you want to donate. That's $25K, so it would make sense to itemize every year, but you're only doing $1K better than taking the standard.

If you bunch $30K in one year, you itemize $45K one year, and take the standard $24K the other two years. That's $93K in deductions total, rather than $75K the other year. $18K more. If you're in the 22% bracket, that's $3960 you'll save in taxes over 3 years.

I think you realize that since you brought it up, but when I agreed with you that it's good, for some reason you downplayed it.

I'm not clear, but maybe I didn't explain. We normally have, say, $10K in cash available to donate. Now I'm passing that through by donating $10K in my most appreciated stock and buying it back with the cash. So bunching might cause me to lose 2 years of appreciation on whatever stock I would donate. I'm unsure of how to evaluate whether this might still be a good strategy due to the uncertainty of the stock's future value, so I am hoping for some opinions from the peanut gallery on that in particular.

No, I get it. Let's simplify it slightly and say you have one highly appreciated stock you want to reset the basis on, by donating it and buying it back. You can buy back $10K with cash you would've otherwise donated, but if you bunch, you can't afford to buy back $30K at once to buy back the stock, you'd have to do it over time. You really don't want to be out of the market with that stock.

What I'm asking is, do you have a second investment, not so highly appreciated, that you wouldn't mind being out of the market with? So you sell $30K of your flagship stock, buy back $10K from cash, and sell $20K of so-so investment and use the proceeds to buy another $20K of flagship stock. Next year, a non-bunch year, you buy back $10K of so-so investment, and the 3rd year, do the same. At the end of 3 years, you have donated $30K, essentially thru cash, but in the process reset the basis of flagship stock and were never out of the market with it. You were out of the market for awhile on so-so investment, but you've caught up.

 

[RunningBum]

One other thought, do you ever plan to sell this stock and not repurchase? If you die with it, it gets passed on to your heirs with stepped up basis. So maybe it isn't so important to reset the basis in that case.

 

[The Cosmic Avenger]

Sorry, I wasn't downplaying bunching, I was saying it wasn't my primary reason for opening a DAF, and now I'm wondering if I try it, will it cancel out my attempt to reset capital gains, and if so, is the bunching worth losing the capital gains reset. I'm coming at it on a year-by-year basis, so I was looking at resetting capital gains first. It might be difficult for us to pull $30K together without selling investments, so that might also cause a tax disadvantage.

I'm not sure, but we probably won't pass on the taxable accounts, we'll probably pass on the Roth IRAs, since if we retire early the taxable account might be the one we need to draw from before age 59.5.

 

[jebmke]

Bunching is usually a good idea if you will be itemizing some years, and not others.

Are there other investments you could sell and use to buy your stocks back immediately, and then over the 3 years buy back those investments?

or if your tax rate is very uneven. We bunched about 15 years of donations the year I retired.