Information is key when using this tax planning strategy
You own some stock that has increased in value. To avoid a possible taxable gain by selling the stock, you wish to give it directly to a child or grandchild. This simple idea has some interesting tax consequences to consider.
Value of the gift
When you gift stock there are not one, but two values to consider.
- Gift value. This is the market value of the stock at the time of your gift. Since there is a possible gift tax to you if the value of all gifts given by you to a person during the year is $15,000 or over ($30,000 for a married couple) you will need to calculate this value prior to finalizing your decision to provide the gift.
- Value (basis) of the stock. You will need to determine the cost to you when you originally purchased the shares. This includes any brokerage or other fees. Provide the date(s) you purchased the stock and these costs to the person who will be receiving the gift.
Provide important information
Basis is key. Those receiving your direct gift of stock are not required to sell it. But when they do, they will need to know:
- The original cost of the stock and when it was purchased.
- The date and fair market value of the stock when it was given.
- If the giver paid any gift tax.
Timing is important. If the recipient of your gift sells the stock right away, the tax rate applied will depend on the length of time the stocks were owned by you. A gain on a stock held one year or less is considered ordinary income. More than one year is a long-term capital gain. The time-frame of this calculation usually goes all the way back to your purchase records.
No taxes. Gifts of stock allow you to avoid paying capital gains tax on the ownership transfer. As long as annual gift amounts to one person are less than $15,000 ($30,000 for a married couple) there is no tax consequence.
Lower taxes. In addition, the future sale of the stock could result in lower taxes. This is because long-term capital gains tax rates can be as low as 0% or as high 20%. Short-term capital gains tax rates can be as high as 37%*. Assuming your child or grandchild has lower income than you, the resulting sale creates a potential tax savings. Care must be taken if the gain is high as Kiddie Tax rules could create a tax bite at the parents’ tax rate.
Kiddie Tax benefit. If the gift stock pays dividends, future dividend income can potentially be taxed at your recipient’s lower tax rate. This technique can be used to provide dividend income without a child having to pay any taxes up to the Kiddie Tax annual limit of $1,100 of unearned income.
Gift to anyone. Your gift can be provided to anyone you wish, not just a relative. These gift rules also apply to other investments like mutual funds, land and other property.
If your stock has a loss it is usually a better idea to sell the stock and take the tax benefit of the loss. If the stock you gift has a fair market value less than your cost, providing the information noted here to the recipient of your gift is even more important.
Please ask for help if you are considering a gift of stock or property. If handled incorrectly, your gift could create unforeseen tax consequences. But used in conjunction with other contribution techniques it can be a powerful tax planning tool.
* An additional 3.8% Medicare Tax or Net Investment Income Tax may also apply.