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Tax Consequences: Think Twice Before Gifting with Cash
Published Date : April 15, 2014
It has become a common practice to take advantage of the charitable deduction when gifting highly appreciated stock to qualified non-profits and charities. What is unknown to many (and now a permanent option thanks to the American Taxpayer Relief Act of 2012), is that gifting appreciated stock to individuals who qualify for the 0% Federal Long Term Capital Gains rate could maximize the net value of the gift to the recipient while allowing high income earners to dispose of appreciated stock while side-stepping higher capital gains taxes of their own.
First, a caveat. Unlike giving a donation to a qualified charity, gifting stock or cash to a person does not qualify as a tax deductible event and any tax liability associated with a stock is passed on to the recipient. As such, many opt for gifting cash rather than stocks to avoid burdening the gift recipient with the associated liability. In certain cases, where the recipient has a lower level of taxable income, that liability is drastically muted. Those adults who fall in the 10% to 15% income tax bracket (and in 2014 have a taxable income of less than $36,900 (single) or $73,800 (married filing jointly), will likely qualify for the 0% federal long term capital gains tax rate. The IRS definition of an “adult” is a non-student over the age of 19, or a fulltime student between the ages of 19 and 24 whose earned income is greater than half of the support provided by their parents. Therefore, likely candidates for this strategy would be a recent college grads or college students working part time with minimal ordinary income.
Let’s look at an example:
A single, 22 year old grad student receives 200 shares of low basis Exxon stock from his parents in 2014. The shares are worth $18,000 today, and were originally purchased in 1987 for $2,000. The student sells the stock in 2014 and realizes a long term capital gain of $16,000. Adding together the gain from the Exxon, his $10,000 earned income from his part time job and subtracting his standard deduction of $6,200, the results is a taxable income of $19,800. Since this falls below the $36,900 taxable income limit for a single person, his entire $16,000 gain on the Exxon gift would be taxed at the Federal rate of 0%. While specific state tax laws will likely incorporate the gain, the total effective tax on the gift would be far below the tax obligation had the parents sold the stock themselves, paid capital gains tax at their own rate, and then gifted the resulting cash.
Knowing if a gift recipient’s taxable income will qualify prior to the conclusion of the tax year may not always be clear. However, a review of the prior year’s tax return by a tax advisor can help determine whether or not utilizing this strategy is optimal in a particular year. When preparing to gift to friends or family, take a moment to consider all of your options before opening up your checkbook. You may be missing out on a simple strategy that, by shifting income to a lower tax bracket, could save thousands of dollars.
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Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
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All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
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