Gift Investments, not just Cash: A Smart Way to Reduce Taxes

If you're thinking about giving money to a family member, there's a strategy worth knowing about. Consider gifting stocks or mutual funds instead of cash this year to save a significant amount in taxes.

Here's the Basic Idea

When you sell an investment that has gone up in value, you owe capital gains tax on the profit. Depending on your income, that tax rate could be 15%, 20%, or even 23.8%.

But here's the good news! Family members who earn less than you could owe zero federal tax on those same gains. The IRS allows people with lower incomes to sell long-term investments completely tax-free.

A Real Life Example

Say you own stock that has grown by $20,000. If you decide to sell it, you could owe up to $4,800 in federal tax depending on your tax bracket.

Instead, gift the stock to an adult child or grandchild who earns a modest income. They then, can sell it and owe little to nothing in tax. This strategy saves you and your family thousands of dollars, and lets you recoup the capital gain on your stock.

Watch Out For

This strategy works best when selling to family members older than 24. Younger recipients, or those under the age of 24, could be subject to special "kiddie tax" rules that can reduce the benefit.

Also, any “gifts” over the valued amount of $18,000 per person, per year, requires a gift tax return to be filed.

Finally, you may be subject to extra state taxes based on your family member’s location. Be sure to review state tax regulations when considering selling to relatives.

Bottom Line

Gifting appreciated investments can be a smart way to transfer wealth while lowering your family's overall tax bill. Talk to your VAAS Tax Advisor before acting. A little planning will go a long way.