We know many of you might give money as well as presents to your children or grandchildren this holiday season. However, what if you could gift to your adult kids/grandkids and help reduce your tax bill at the same time?
You can, and the good news is it can be easy to do. You don’t have to give them all your holdings of a stock. Simply identify how many shares you would like to gift, ensure they are transferred by the end of the year, and you’re done!
On March 2, 2009, the Dow Jones Industrial Average closed at 6,763. Recently it has closed over 27,700. If you have held individual U.S. stocks over this period, it is possible that the gains in some of these stocks have been 200-400% or even higher. While this type of growth has helped improve your net worth, it can often come with a substantial capital gain if it is sold.
By gifting highly appreciated stock in your taxable account to an adult loved one, you might be able accomplish three important objectives:
- Financial Education - Giving your loved one an asset that has the propensity for long term growth helps them better understand the potential benefits of long-term investing. Over time, this is a great way to encourage your loved ones to accumulate their own wealth.
- Avoid a tax liability – Depending on your current earnings, the tax costs of selling the stock yourself could be high. See example below.
- Reduce risk- Gifting single stock positions will lower the overall stock exposure in your portfolio which helps reduce risk.
That sounds great, but how does it work? Glad you asked, here is an example:
Let’s say I bought 100 shares of ABC stock many years ago at $100 per share in my taxable account. My basis in that stock would be (100 shares X $100 per share) or $10,000. Fast forward to today and my ABC stock position has grown to $230 per share and my 100 shares are currently worth $23,000.
If I would like to reduce the risk of my portfolio by selling all or part of this stock holding, I have two options:
- Sell the stock myself for $23,000. This would lead to a gain of $13,000. Depending on my tax bracket this could result in a tax bill as high as a $4,329. (20% Federal capital gains rate plus 13.3% California Income tax rate= 33.3% tax rate). I could also pay a 3.8% Net Investment Income Tax.
- Gift $15,000 worth of the stock (around 65 shares) to my grandson who is right out of college. In 2019, $15,000 is this amount of the annual tax exclusion. If I am married, my spouse and I could gift the whole position to Ryan as we can each gift $15,000 annually to him. Our tax bill for this transaction will be zero and Ryan will receive an asset that will come with two choices.
Option A: If he needs the money, he can sell the shares of ABC stock at his own tax bracket. Depending on his income, this could be as low as 0% in Federal taxes, which could be a substantial savings if I am in the 20% bracket.
Option B: Ryan can keep the shares of ABC stock and assume my low basis. He won’t have any tax liability should he decide to keep the shares other than potentially some dividend income which would get added to his taxable income each year. Keeping the stock, Ryan gets exposure to investing and hopefully gets to learn about the value of long-term investing.
Note: This strategy works best when your loved one’s tax bracket is significantly lower than yours. If your loved one’s tax bracket is as high or higher than yours, this is equivalent to putting a lump of coal in their stocking.
If you are considering this strategy, we highly recommend that you consult your financial team, including your financial advisor and CPA to make sure it is right for your specific situation. Additionally, I firmly believe that a creative gift-wrapping team can help you make unwrapping this very personal, thoughtful gift, a special part of any holiday.
Wishing you, and yours a special holiday season.
Please note that individual situations can vary. Therefore, the information presented here, should be relied upon when coordinated with individual professional advice. Genovese Burford & Brothers Wealth and Retirement Plan Management, Inc. is neither a law firm nor a certified public accounting firm and no portion of the content should be construed as legal or accounting advice.