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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.

Photo by Keith Allison on Flickr.com

You’ve probably heard the story about Christian Lopez, the guy who caught Derek Jeter’s 3,000 career hit ball at Yankee Stadium and then was classy enough to return the ball to Mr. Jeter. He was rewarded handsomely by Yankee management with box seat tickets for the rest of the season, autographed balls and other merchandise. There’s been a lot of talk on the radio and in the media about the IRS going after Mr. Lopez for taxes. And while there are some really good articles out there already about the tax issue, I’ve decided to answer some of the actual questions people have been asking me because not all the stories running around out there are accurate.

I’ve heard that the IRS has already issued a bill to Christian Lopez for $10,000, how can they do that? That rumor isn’t true. There’s some speculation about how much tax Lopez will have to pay, but no bill has been issued by the IRS-they just can’t do that. The IRS will have to wait until April 15, 2012 to see any money from this event.

I’ve heard that Christian Lopez will have to pay a gift tax to the IRS for giving the ball to Derek Jeter. Why? First, that’s not true. But this is why people are talking about that: You can give a “gift” to someone with a value of up to $13,000 and not have to deal with any gift tax issues. People estimate that the ball Christian Lopez caught is worth between $275,000 – $300,000. Since Lopez gave it to Jeter, some people are erroneously calling that a gift. Even if they would be right about the gift, you can gift up to $5 million in your lifetime without paying tax on it—it just requires paperwork.

But I say it’s not a gift at all. Christian Lopez caught the ball and gave it back right away. Kind of like turning down a prize at a game show, he just gave it back so there’s no taxable transaction there. I’m from St. Louis. In 1998 when the fan returned Mark McGwire’s ball when McGwire broke Roger Maris’ single season home run record, the IRS did not require a gift tax return. That gives Lopez legal precedent.

But what about the tickets and stuff the Yankees gave him? Will that be taxed or is that a gift too? It would be nice if it could be considered as a gift, but it won’t. I’m pretty sure that the Yankees will issue a 1099 to Christian Lopez for the value of the tickets and merchandise he was awarded.

So he’s screwed no matter what? Not completely. One option is for Christian Lopez is to sell some of his tickets.

But if he sells the tickets, then won’t he have to pay tax on that money too? Only if he makes a profit. You see, because he’s paying tax for receiving the tickets then he has what’s called basis in the tickets. Say for example one of the tickets is worth $100 (I know it’s worth more than that, but let’s make the math easy.) Christian Lopez is getting taxed on receiving the full fair market price of the ticket, right? So it’s like he paid the full $100 for the ticket. So if he sells that same ticket for $100, he hasn’t made a profit on it, so there’s no tax on the $100 (because he’s already paid the tax on it). For you tax geeks, it would go on a Schedule D, just like selling stock.

Now it’s possible that Christian Lopez could sell his $100 ticket for $125. (Come on, really. Wouldn’t it be kind of cool to sit in Christian Lopez’s box seat? I think people would pay extra for that.) If he sells his tickets for more than their face value, he would be stuck paying taxes on the profit. That’s cool, make a profit and smile. If I were Mr. Lopez, I’d sell enough tickets to be able to pay the taxes and have fun going to as many baseball games as I could.

For more tax information about the Jeter baseball, this article at Accounting Web.com makes the most sense: http://www.accountingweb.com/topic/tax/jeter-baseball-fan-catches-bad-tax-advice

Tag: gift

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

Baseball Fans and Taxes: Christian Lopez and the Derek Jeter Ball