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Mark Luscombe, principal tax analyst at CCH, a Wolters Kluwer unit that provides tax and other business information, offers this example: Suppose the Joneses give stock that has gone up by $100,000 over several years to their 18-year-old daughter. Assume the income brackets, standard deduction and exemption amounts rise by about the same dollar amounts in 2008 and subsequent years as they did from 2006 to 2007. That means the daughter could have taxable income of up to about $33,900 in 2008 and stay within the 15 percent bracket, Mr. Luscombe estimates. Thus, she could sell part of the stock in 2008, remain in that bracket, and pay zero capital-gains tax on the sale -- and then spread out selling the rest of the stock over the next two years. Or she could sell the entire amount in 2008 and pay zero tax on the first slice and 15 percent on the rest.
But use caution: Such gifts may cause problems for students applying for college financial aid, or to seniors seeking Medicaid eligibility, including for nursing-home care. They could make a senior's Social Security benefits subject to tax, or increase the tax on those benefits. Also, because of the recently expanded reach of the so-called kiddie tax, investment income above $1,700 for a child younger than 18 typically is charged at the parents' higher tax rates. It's always smart to check with a financial adviser before making a large transfer of shares.
Nadine Gordon Lee, president of Prosper Advisors LLC, an Armonk, N.Y., wealth-management firm, says she is already planning to take advantage of the upcoming 0 percent rate. She and her husband have begun transferring shares of equity-based mutual funds, purchased at a lower cost, to one of their sons, now 16. The plan is that he will begin selling them in 2008, when he turns 18, Ms. Lee says. The Lees also are giving highly appreciated stock to their other son, who is 19, and those shares are being sold this year at the current capital-gains-tax rate of 5 percent for lower-income brackets.
Giving appreciated stock "works nicely for funding the lifestyle of your college and graduate students who are not eligible for financial aid," Ms. Lee says.
Before making any such gifts, be sure to check with a tax adviser on any possible gift-tax or estate-tax consequences, or other possible hitches, Ms. Lee says. However, a gift of this type may be an efficient way to use the annual gift-tax exclusion, she says. That means you can give away as much as $12,000 this year to anyone else -- and to as many other people as you wish -- without any federal gift-tax consequences. A husband and wife can give away a total of $24,000 per recipient. (Gifts that exceed those levels must be reported to the Internal Revenue Service. Generally, there's a lifetime gift-tax exclusion of $1 million per donor. Gifts above that limit typically are subject to gift tax, and the top rate now is 45 percent. Gifts don't count as taxable income to the recipient. They also aren't deductible on the giver's income tax returns.)
Investors should never sell securities solely because of tax considerations. But if you're thinking of selling anyway, understanding the tax considerations can help you and your family keep more of the gains.
For example, suppose Parents, who file joint, will have
$90,000 of wage income for '08, and will therefore not
qualify for the 0% rate. Suppose also that they intend to
sell stock with a value of $12,000 to pay for child's
tuition in '08, and that child has her own taxable income of
$10,000 from wages. If the basis in the stock is $1,000,
then gain from the sale will be $11,000. If Parents sell
the stock, they will pay tax of $1,650 on the sale, leaving
them with net cash of $10,350 ($12,000 proceeds, less $1,650
tax) to spend on child's tuition. On the other hand, if
Parents make a gift of the stock to child, and child sells
the stock for $12k, then child will also recognize $11k of
gain (basis transfers in this case), will have total taxable
income of $21,000, thereby qualifying for the 0% rate on all
of the gain, and will pay a tax of $0. As a result, child
will have net cash of $12,000 ($12,000 proceeds, less $0
tax) to pay her own tuition. In addition, child is likely
to qualify for one of the education credits, resulting in
even less tax due on her other wage income. Assuming that
child qualifies for a $1,000 education credit as a result of
paying her own tuition (which should be fully useable with
other taxable wage income of $10,000), the net effect of
Parents transferring the stock to child instead of selling
it and paying the tuition themselves could be as great as
$2,650; i.e., child receives $2,650 more in economic benefit
- money to spend - than if Parents had sold the stock