By Carolyn Stewart
Even if the holidays have passed, it’s never too early or too late to start thinking about what gifts you can give to your loved ones. While they may tell you they want the latest AirPods or a new watch, you may want to consider something more meaningful and a little less flashy. Gifting appreciated stock to a relative in a lower tax bracket than you not only will save you money, it also can jumpstart a young person’s portfolio—or it can simply be a tax-efficient way to give them cash to buy AirPods themselves.
When you sell a security, the sale is considered either a short-term or a long-term capital gain. Short-term gains apply when you’ve held the security for less than a year, and are taxed as ordinary income. If you’ve held the security for more than a year, the gain on the proceeds of the sale is taxed using long-term capital gains rates based on your taxable income. This example will focus on the long-term rates, which are in 0%, 15%, and 20% brackets. The 0% bracket applies to individuals with taxable income of up to $83,350 if they are married filing jointly, and $41,675 if they are filing single.
To avoid paying 15% or 20% rates on highly appreciated securities, you can gift the security to a relative in that 0% bracket, and, when they sell the security, the gains will be realized tax-free for both you and the recipient. The recipient of the gift receives your cost basis in and holding period for the security, so the long-term capital gains rates apply to the recipient even if they sell immediately since you have held the security for over a year.
For example, let’s assume you bought a stock for $1,000 ten years ago, and it is now worth $15,000. Your basis is $1,000, and the unrealized long-term capital gain is $14,000. Additionally, you are in the 20% bracket, because you and your spouse have taxable income of $500,000. Your daughter Sally and her husband have taxable income of $50,000, so they are in the 0% bracket. If you gifted Sally that $15,000 worth of stock, you have shifted that tax liability to Sally, but because she is in the 0% bracket, she won’t pay any taxes either—even if she immediately sells the stock. You are saving $2,800 in taxes ($14,000*20%) through the gift tax exclusion by gifting the stock to Sally, and Sally gets to keep the entire $14,000 gain plus the $1,000 you paid ten years ago.
As always, there are some considerations when employing this strategy. In the above example, if Sally were under 18 (or under the age of 24 and a full-time student), most of your gift would still be taxed at 20%. On top of that, it could affect her financial aid eligibility (if that is a factor). Another item: could your gift perhaps push Sally into a higher tax bracket, ultimately in the 15% bracket? While using this strategy to save money and benefit others, it is always best to consult your financial advisor or CPA before making the gift.
Abacus https://www.abacusplanninggroup.com/ is a financial advisory and investment counsel firm known for its passion in creating abundance for clients and family businesses through skillful listening and smart financial decision making. Managing over a $1.7 billion on behalf of its 250 plus families, Abacus consists of a team of multi-disciplinary experts who work collaboratively to serve its clients.
Carolyn A. Stewart graduated from Virginia Tech in 2021 with a B.S in Finance. Carolyn joined Abacus in 2021.