Gifting Stock with Long Term Capital Gains—Helping Granny and Yourself

Photo by Amanda Schutz on Flickr.com

I recently wrote about some of the basics of capital gains taxes.  Today I’m going to talk about one strategy that you might be able to use to reduce those taxes.

The old strategy to avoid paying long term capital gains tax was to gift appreciated stock to your children because they’d be in the 0% capital gains tax bracket.  But now—with the kiddie tax rules—that strategy doesn’t work anymore.  Children are taxed at their parent’s rate.

But there may be another way around that rule without using your kids:  use your parents or grandparents instead!                  People in the 15% or lower income tax bracket are in the zero percent capital gains tax bracket.   If you have older family members that you’re helping out financially, gifting stock could be a win/win solution for both of you.

Let’s say your mom is retired and basically living off of social security.  You want to help her out by giving her $10,000 to cover some of her expenses.  You can just “gift” her the money—no tax consequences for her or you, or you could “gift” her some appreciated stock.  If possible, I vote for the appreciated stock.

Here’s why:  suppose you have some XYZ stock that you bought years ago for $1,000, but today it’s worth $10,000.  (Good for you, by the way.)   If you sell it now, you’ll have to pay $1,350 in long term capital gains tax.  ($10,000 – $1,000 = $9,000 capital gain.  Multiply that by the 15% capital gains tax rate, then $9,000 x .15 = $1,350.)

Now if your mom’s only income is social security, then she’s in the zero percent capital gains tax bracket so her tax would be zero!  See why this is a good idea?

For 2012 you can gift up to $13,000 to someone with no gift tax consequences.  If you are married, then you and your spouse could each gift $13,000 to one person (although you’d have to prepare a gift tax return to show that you were gift splitting.)

This gifting of stock isn’t just limited to your parents; you can potentially gift stock to anyone that is in the zero percent capital gains tax bracket (except for your children.)  Of course you don’t want to just gift stock to people you weren’t planning of giving money to in the first place.  Once you make the gift, it’s not your money any longer.

This strategy may not be a viable option for 2013 so if you’re thinking about gifting stock, you should at least get your ducks in a row now so that you can do the transactions before December 31^st if necessary.

Be sure to run the numbers with your parent’s first before just “gifting” stock to them.  There may be other considerations that you’re unaware of where the capital gains could create a problem for them.  Remember, reducing your tax burden isn’t such a great idea if it’s going to cause problems for your parents.  Be sure to look at the big picture.