Gifting Appreciated Stock To Family Members

gift_cashby David John Marotta and Megan Russell

Many family members give money to their children. For children with lower incomes, there is an opportunity to give them appreciated stock to shift the capital gains to a lower tax bracket.

Current tax law has separated capital gains into four separate tax brackets.

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Those in the lowest income tax brackets experience a 0% federal capital gains tax. In 2016, this capital gains opportunity is available to single filers with income under $37,650 and married filing jointly filers with income under $75,300.

Meanwhile, the highest income tax brackets experience a 23.8% federal capital gains tax. In 2016, the highest bracket is experienced by single filers with income over $415,050 and married filing jointly filers with income over $466,950.

Additionally, you have state tax treatment of capital gains to add into the tax burden. California has ten different capital gains tax rates, the highest of which is 13.3%. This means California filers in the top income brackets experience a marginal tax rate of 37.1%.

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There are currently nine states with no personal income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. In these states, if you are in the 0% federal capital gains tax bracket, you are not required to pay any state capital gains tax either.

Like many states, Virginia taxes capital gains at the ordinary state income tax brackets. While those in the lower brackets may be able to realize capital gains at a 0% federal tax rate, they will still likely be subject to a 5.75% state tax rate for any income or capital gains over $17,000.

These differences in tax rates provide an opportunity for generational tax planning. High income parents subject to California’s 37.1% capital gains tax rate could gift shares of appreciated stock to their children living in Washington who could then sell the stock and not be subject to any capital gains tax.

Ten years ago gifting appreciated stock was the preferred financial planning method for funding a child’s college education. But in 2006 Congress raised the kiddie tax such that dependents up to age 23 are subject to their parent’s tax rate on investment assets if they are full time students.

However, for children age 24 and over gifting appreciated stock may result in some significant generational financial planning to reduce the extended family’s taxes owed.

Currently for 2016, the annual gift excluded from estate considerations is $14,000. That means that a mother and father could each give $14,000 in appreciated stock to both a son and a daughter-in-law, effectively giving $56,000 to the young couple.

Gifting appreciated stock is best when children need the money now for current expenses.

If they don’t need the money now, you might be better off leaving them your investment portfolio in your estate plan. When your children inherit those securities, they receive a step-up in cost basis, effectively owing no capital gains tax on gains you experienced. Inherited investments appreciate your entire lifetime without any taxation on that growth to your heirs.

Not all capital gains can be avoided, but if you are willing to shift assets between family members it can sometimes be reduced.

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David John Marotta CFP®, AIF®, is President of Marotta Wealth Management, Inc. of Charlottesville providing fee-only financial planning and wealth management at Subscribe to his blog at Questions to be answered in the column should be sent to questions at emarotta dot com or Marotta Wealth Management, Inc., One Village Green Circle, Suite 100, Charlottesville, VA 22903-4619.
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