Do you have a loved one that may be in school, struggling with student loans, or buying a house? Yes? No? To be honest it doesn’t matter, because for this tax savings gifting tip, you don’t need a “qualified” reason or any reason at all! You can simply gift stock, help a loved one out and still reap a small benefit. I’m sure you are all wondering “How can I give away my stock and still benefit?”
You’ve most likely heard of the annual gifting exemption amount ($14,000 for 2015 and 2016), but what do you get out of cutting a check to someone for that amount? I understand that isn’t the point of gifting, however, you can still give yourself a small benefit for being a nice person, right?
Okay, so here are the requirements. First, the loved one has to fall into the 10%-15% ordinary-income tax bracket. Meaning their “taxable income” (Line 43 of the 1040) has to be $37,450 or below for 2016. If the individual is under that threshold then their long term capital gains tax rate is 0%. This means when you transfer them stock, and they sell it, that gain will be tax free. Now, if you sold it and you are above that threshold, you would be paying tax on that LT Capital gain, which could be at a maximum rate of 20%. On top of that, it could be subject to NIIT, which is another 3.8% for a total tax rate of 23.8%. By gifting the stock instead of selling it and cutting a check, you just saved yourself the tax liability that would have been generated by the gain. The loved one receiving stock won’t have that tax liability on the LT capital gain.
Please note that the gift tax exemption and gifting rules still apply. Also, you have to take into account the amount that was gifted doesn’t put the “taxable income” over the threshold. With that said, the tax savings would be capped by the gift exemption amount. So, this tax savings tip isn’t going to make you rich, but it could definitely put some extra spending money in your pocket. Remember the bigger the gain, the bigger the savings, so choose wisely when gifting and as always, we recommend talking with your tax adviser ahead of time.
By Chris Morrison, CPA