Tax Tips
Lower Taxes By Gifting Appreciated Property to Younger Family Members. - January 2007
Richard Scrivanich - Partner
If you are not currently eligible to get the benefit of the lowest 5% capital gains rate available to some taxpayers (because you have too much ordinary income), you may be able to achieve tax savings by making gifts of appreciated stock or other capital assets to a family member eligible for that rate (for example, a child or grandchild, with little or no ordinary income, who is or soon will be in college and whose tuition and related expenses you are or will be paying).
As you may be aware, the capital gains tax on the sale of most assets held for more than one year (long-term capital gains) is normally taxed at a maximum rate of 15%. If "adjusted net capital gain" would otherwise be taxed at a rate below 25% (i.e., at 10% or 15%) if it were ordinary income, it is taxed at a 5% rate (0% for tax years beginning after 2007). (For a single individual for 2006, taxable income not over $7,550 is taxed at the 10% rate; taxable income over $7,550 but not over $30,650 is taxed at the 15% rate.)
If you are in a tax bracket higher than 15%, and your taxable ordinary income is more than the amounts taxed to you at the 10% and 15% regular tax rates (which vary depending on your filing status), your gain on securities and other capital assets that you held for more than one year before you sell will be taxed to you at the 15% capital gains rate. But there is a way for you to dispose of appreciated assets now and have the gain taxed at a rate that's as low as 5%. This tax-saving device involves gifts to children, grandchildren, or other family members. What you must do here is to make a gift of appreciated stock that you have held for more than one year to someone to whom you would otherwise be making gifts, and then have the recipient sell the stock. The recipient's holding period includes the time that you owned the property. And the amount of gain the recipient recognized on a later sale is based on your cost or other basis. This means that if the recipient is in the 10% or 15% tax bracket, the resulting capital gain is taxed to the recipient at only 5%.
Example: Alex and Beth are the grandparents of Claire, an 18 year-old who will shortly be entering college. Alex and Beth, who are in a tax bracket higher than 15%, want to help Claire's parents with the tuition and related costs that will arise. To do this, they intend to make annual gifts to Claire starting this year. To provide the funds for this year's gift, Alex and Beth plan on selling stock that they purchased several years ago for $5,000 and which is now worth $20,000. The problem with this scenario is that Alex and Beth will have to report the $15,000 capital gain on their tax return. Unless they have realized capital losses to offset this gain, their tax bill will rise by $2,250 ($15,000 × 15%).
Tax-wise, the better route is for Alex and Beth to make a gift to Claire of the stock itself, with the stock then sold for Claire's account. Assuming Claire's taxable income is in the 10% or 15% tax bracket, her gain on her sale of the stock will generate tax of only $750 ($15,000 × 5%)-a tax savings of $1,500. Note, however, that this strategy only works if the recipient of the gift is at least 18 years of age at the end of the tax year in which he or she sells the stock. For younger recipients, the "kiddie tax" rules would require part of the gain on the stock to be taxed at the recipient's parent's tax rate.
If you have any questions regarding gifting or any other tax matter, please feel free to give me a call at (562) 698-9891.
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