“Gifting” Appreciated Shares of Stock to Your Older Children

“I’m proud to be paying taxes in the United States. The only thing is I could be just as proud for half the money.” – Arthur Godfrey

Last week, in Message  #962, we looked at ways to take advantage of the recent cut in capital-gains taxes. This week, I want to share another tax-saving strategy from Stephen S. Meredith, CPA, the owner of a private accounting firm that focuses on creating and implementing wealth-building strategies for business owners, investors, and real-estate professionals.

This time, Meredith’s advice (which was passed on to me by Dr. Van K. Tharp, the founder and president of the International Institute of Trading Mastery Inc.) is based on the fact that your children probably pay taxes at the lowest possible rates because their income is low while you pay higher taxes because you’re in a higher tax bracket.

Let’s say, for example, that you need to come up with a hefty hunk of money — $22,000 — to pay expenses or perhaps to help your son or daughter get started in a business. To come up with that money, you decide to sell $22,000 worth of stock with $18,000 in gains built in.

There’s one catch, though. The tax consequences. When you sell the stock, assuming you’re in the 25% tax bracket, you have a tax bill that amounts to 15% of the capital gains. In this instance, that bill would be $2,700 ($18,000 x 15%).

However, there is a way to legally cut that tax bill to the bone . . . or nearly to the bone.

If you make your child a gift of shares that have appreciated, the tax bill on the increase in value is passed on to him along with the gift shares. So when he sells the shares to pay tuition or other bills, the $18,000 in capital gains will be taxed at his significantly lower rate.

How much of a difference can this make?

Well, if we assume that the child is in the lowest tax bracket, the tax bill under the new tax law would be a paltry $900 ($18,000 x 5%). That’s a saving of $1,800 . . . more than enough to make the transaction worthwhile. Don’t think your child has to hold on to the stock for at least 12 months to get long-term capital-gains treatment, either. When gifts of an appreciated asset are involved, the recipient’s holding period includes time in which the donor owned the property.

One caveat: Make sure the gift doesn’t cost you your ability to claim the child as a dependent, which would happen if his total earnings (including capital gains) became so high that he would be providing more than 50% of his own support.

By the way, this strategy also takes advantage of the federal gift tax. The law permits you to give up to $11,000 to any number of people without having to worry about the gift tax. So, if you’re married, you and your spouse can give up to $22,000 to each person on your gift list, including each of your children.