The scenario: you own some stock that has increased in value. To avoid recognizing a taxable gain by selling the stock, you wish to give it directly to a child, grandchild, or friend. This simple idea has some interesting tax consequences to consider.
The 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. If the value of all gifts given by you to any one person during the year is $15,000 or over ($30,000 for a married couple) you may need to report this value on your tax return. While the gift is likely not a taxable event to you, it does count toward your lifetime gift tax exemption amount ($11.58 Million in 2020).
- 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.
The person who receives the stock needs a few pieces of information. The recipient of the gift of stock is not required to sell it upon receipt, however, when they do sell the stock, 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 and will likely incur a more favorable tax rate than that of short-term gains.
The benefits:
- 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 reporting requirement.
- Lower taxes. The future sale of the stock could result in lower taxes. Assuming the recipient of the gift is in a lower tax bracket 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.
Should you give stock that has experienced a loss? If you have experienced a loss on the stock, it is usually a better idea to sell the stock and take the tax benefit of the loss than to give it away.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.