Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
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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