We’re occasionally asked by friends, clients and colleagues whether it’s possible to give gifts in a tax-efficient manner.
The answer generally depends on the value of the gift, the nature of the asset, and who the recipient is.
Gifts of money to anyone – including a family member – will not trigger a gift tax return or gift tax if the total amount of all gifts to the recipient is not more than $15,000 during the tax year. If gifts other than cash are made, their value must be included in calculating the $15,000 limit.
Higher gifting limits may be available for higher education costs paid directly to a qualifying school, as well as for medical expenses paid directly to the health care provider. It should be noted that direct payment of education costs may reduce need-based aid available to the student.
Gifting appreciated stock may be a good strategy if the recipient is in a low tax bracket for long-term capital gains. The 0% tax bracket on long term capital gain will apply to the 10% and most of the 12% ordinary income tax bracket.
Let’s consider an example. You’re considering giving your adult daughter stock in Company X worth $10,000, which has a $2,000 cost basis. If you’re in the 22% marginal income tax bracket and decide to sell the stock rather than gift it, you would owe capital gains tax of $1,200 on the $8,000 gain, since your capital gains rate is 15%. The higher the marginal tax bracket, the greater the tax would be. If you instead gift the stock and your daughter then sells it, assuming she has $35,000 in W-2 wage income, the additional $8,000 of long-term gain would likely be taxed at 0%, resulting in an overall savings of $1,200.
The value of this strategy depends on the recipient’s income and marginal tax bracket, and will decrease or disappear in relation to their income.
A note of caution: when gifting to children, the “kiddie tax” should be considered. The unearned income of full-time students under age 24 that exceeds $2,200 may be subject to tax at the income tax brackets for trusts and estates, which reduces the benefit of gifts of appreciated assets.
Choosing the right giving strategy can lower taxes for the donor and increase the benefit to the recipient.
Before starting a gifting program, you should consult a qualified tax advisor and financial planner.
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