Gift Tax Exclusion

snipped-for-privacy@hotmail.com posted:

If you're giving him the stock, you will be transferring your basis along with the shares -- i.e., zero -- and a contingent tax liability for when he sells the stock. The "theoretical value" of your gift would be the average market valuation on the day of transfer (or the closing value on that date) -- without considering tax implications. This is an interesting question -- because it appears to be a "tax-free" gift on the face of it -- but it's really a gift which carries a tax liability passed on to the recipient.

If you want to give him $12,000 -- the current limit, above which a return (Form 709) would be required, then you could sell the stock and give him the cash. (Of course, you would owe any tax obligation incurred.) I believe that if the value of your stock on the day you transfer it, exceeds $12,000, then this requirement would kick in.

Bill

The current value of the stock is its fair market value on the date of the gift. As the other Bill noted, the current value is the value used for gift tax purposes. If you also gift your son the cash needed to pay income tax on his sale of the stock (his basis would also be zero) that dollar amount is added to the FMV of the stock to determine the total gift.

Good luck.

Bill B

Since the taxes would not need to be paid until April of the following year, wouldn't it make more tax sense to give the stock now and the cash to pay income taxes the next year? Then you would get another round of the exclusion.

Yep, it sure would.

However, there would likely be penalties for paying tax late. That is, tax on 12k of stock is about 1.8k at 15%, and if on April 15 of next year you owe more than 1k there will likely be penalties for paying tax late. To avoid the penalty you can make an estimated payment (due dates are 4/15, 6/15, 9/15, 1/15) or equal estimated estimated payments each of the 4 "quarters". It may also be possible to avoid the penalty by taking advantage of prior year safe harbor, increasing withholding at work, having other deductions such as mortgage interest and IRA. In any case, the penalty is small -- probably under $100 here, but you'd have to check to be sure.

For gifts over 12k, any gift tax paid by the giver gets added in a complicated manner to the cost basis of the stock, meaning that some of that gift tax is recouped when you eventually sell.

There are also state tax issues to consider.

There are safe harbors. If the kid had zero tax liability in the prior year, the penalty for underestimating taxes would be zero.

The maximum marginal federal tax on a $12,000 LTCG is $1,800. The maximum marginal underestimating penaly would be about $50-$60.

BTW, to be clear taxes are only due if you sell the stock.

Yeah. The fee a professional tax preparer might charge to prepare form 2210 Schedule AI (which allows you to pay a different amount of estimated tax each "quarter" because your income varies during the year), would almost certainly be more than $50, or $100. The cost to do it on your own through Turbotax would be less, but then there would as in the other case be the added time, cost of additional paperwork (because all your income has to be tracked by quarter).