Family Tax Planning
donating appreciated securities to charity,
another solution for avoiding highly taxed
capital gains on these securities is to
transfer the relevant assets to a family
member in a lower tax bracket. The recipient
might be able to sell and pay little or
no tax on the sale.
Grace Fulton invested $10,000 in ABC
Corp. shares years ago. The shares are
now worth $18,000; Grace fears the trading
price of ABC will drop, so she'd like
to sell the shares. However, Grace will
face a significant tax bill if she takes
an $8,000 long-term capital gain.
Grace gives the shares to her son Eric,
who sells them. Grace's basis in the shares
($10,000) and her holding period (longer
than a year) carry over to Eric, so he
reports an $8,000 long-term capital gain.
As long as Eric will owe less tax on a
sale than Grace would have owed, the Fulton
family will come out ahead.
This scenario can work in real life, but
there are some issues to keep in mind.
For one, gifts over $14,000 to any one
recipient in 2014 may trigger the requirement
to file a gift tax return. There may not
be any gift tax owed, due taa $5.34 million
lifetime gift tax exemption, but there
can be paperwork requirements and the
potential loss of estate tax benefits.
the so-called kiddie tax limits the advantage
of transferring assets to youngsters before
a sale. In 2014,"kiddies" are
taxed at their own tax rate on their first
$2,000 of unearned income and generally
owe little or no tax on the income. Beyond
that $2,000, though, unearned income is
taxed at the parent's rate. Thus, if Eric
Fulton has an $8,000 long-term gain from
a stock sale and no other unearned income
in 2014, $2,000 would get favorable tax
treatment, but the other $6,000 would
be taxed at his mother Grace's rate.
key question, then, relates to which youngsters
are considered kiddies. Generally, that
includes children 18 or younger. Kiddie
tax status persists until age 24 for full-time
students who provide less than half of
their own support. Consequently, the strategy
described in example 1 would offer little
benefit if Eric is a college student this
year, age 23, living nearby and spending
most of his time going to class or studying.
Eric is age 24, though, going to graduate
school, the story can have a happier ending.
Instead of selling the stock and paying
tax on the gain, Grace can give the shares
to Eric, who can make the sale this year.
In 2014, a single taxpayer can have taxable
income (after deductions) up to $36,900
and owe 0% on long-term capital gains.
(The 0% tax rate for such taxpayers also
applies to most stock dividend income.)
As a result, Eric could keep all $18,000
from the stock sale and use the untaxed
dollars to pay his school bills.
2014, the 0% rate on long-term capital
gains also applies to married couples
reporting up to $73,800 on a joint tax
return. Therefore, transferring appreciated
securities to family members with low
to moderate income can be a substantial
tax saver. Such gifts might be made to
a married son or daughter who is buying
a home, for example, or to retired parents
who need financial help. However, as with
all financial decisions, you should think
carefully about all possible outcomes
before giving away assets.
Source: November 2014 AICPA Client