Question regarding gifting of stocks

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Good morning FWers,

I am considering the option of gifting stocks to my parents. The idea is the following. Apparently, one can gift up to $13,000 a year to one person without having to report it to the IRS. So basically, I can gift 13k to my mother and 13k to my father. If I gift those stocks to my parents, they can sell it in 2012 and pay 0% in capital gains taxes because of their low bracket and the special law this year. I want to take advantage of this option of giving money to my parents. Less money for the IRS, more money stays in the family.

I guess I want to know if some of you guys have already done this and if so, I want to make sure this is completely within the tax laws. Also, I guess they would not pay any Federal taxes on the capital gains. But they would have to pay state taxes. Now, my parents live in Puerto Rico. Does anyone knows what the tax law is down there? Unfortunately, information regarding the tax laws in P.R. are not easily found on the internet. I don't think you guys would know this information, but you have surprised me before, so who knows.

Well, hope to hear form you guys.

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I have a relative that has gifted to my wife and I 26K in several years. Gift tax is supposed to reported by the donor - but under the amounts you stated you do not need to report.
(http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/F...

Question is why are you looking to do this as stock that they will sell immediately as opposed to just cash?

The reason is that if I sell the stock now, I incur in long term capital gains (15%), while if I pass the stock directly to them, and they sell in 2012, based on their low incomes, they would pay 0% long term capital gain to the IRS.

Now, what taxes they would pay in Puerto Rico (state) is unknown to me. But I doubt it would be higher than the 15% + Connecticut tax that I would pay.

Ah sorry - I misunderstood that you would be buying stock for them and not gifting existing.

It all looks sound to me - if everyone was in the US. You really need to research if the limitations are different for donations to P.R. both from US tax law side and P.R.

noelandres said:   The reason is that if I sell the stock now, I incur in long term capital gains (15%), while if I pass the stock directly to them, and they sell in 2012, based on their low incomes, they would pay 0% long term capital gain to the IRS.

Now, what taxes they would pay in Puerto Rico (state) is unknown to me. But I doubt it would be higher than the 15% + Connecticut tax that I would pay.

http://www.fool.com/investing/small-cap/2004/12/06/gift-stock-an...

Let's say you bought 100 shares of Carrier Pigeon Communications (ticker: SQAWK) at $50 per share. A year later they're trading at $100 per share and you give them all to your son. A month after that, he sells them for $110 per share. What's his taxable gain? It might seem that your son's profit is just $10 per share, but our friends at the IRS don't see it that way.

I support you in using any tax benefits available to you with this - in general though, remember that you made a profit and so it's not so bad to pay a little bit of taxes. The government has provided a lot (national security, yadda yadda) that enabled this profit to be made. Like I said - go lower the taxes as much as possible, defer them, whatever, but if you have to pay, it's still not too bad of a deal when you look at the kind of living situations other countries are in.

ankitgu said:   noelandres said:   The reason is that if I sell the stock now, I incur in long term capital gains (15%), while if I pass the stock directly to them, and they sell in 2012, based on their low incomes, they would pay 0% long term capital gain to the IRS.

Now, what taxes they would pay in Puerto Rico (state) is unknown to me. But I doubt it would be higher than the 15% + Connecticut tax that I would pay.

http://www.fool.com/investing/small-cap/2004/12/06/gift-stock-an...

Let's say you bought 100 shares of Carrier Pigeon Communications (ticker: SQAWK) at $50 per share. A year later they're trading at $100 per share and you give them all to your son. A month after that, he sells them for $110 per share. What's his taxable gain? It might seem that your son's profit is just $10 per share, but our friends at the IRS don't see it that way.

I support you in using any tax benefits available to you with this - in general though, remember that you made a profit and so it's not so bad to pay a little bit of taxes. The government has provided a lot (national security, yadda yadda) that enabled this profit to be made. Like I said - go lower the taxes as much as possible, defer them, whatever, but if you have to pay, it's still not too bad of a deal when you look at the kind of living situations other countries are in.


ankitgu,

The example given in fools.com does not contradict my position. Yes, the cost basis used for my parents will be the same as mine. So yes, they would have a big capital gain. So how come they would pay 0% while I would pay 15%? Because, for 2012, people who fall in the 10% and 15% income brackets (which my parents do, but not me) pay 0% in long term capital gains!!!

I was doing some research regarding the capital gains that my parents would have to pay to the government of Puerto Rico. It turns out that down there, short term capital gains are taxed at 29% (short term is 6 month thought), while long term capital gains are taxed at 20%. So there goes the savings. I guess if my parents lived in Florida, this would make sense. I'll have to move them there in the future

Now, you may think that I am cheating the system, but I am just following the law. Nothing illegal here. You can give gifts and the capital gains taxes are low for low income families. Also, I am of the opinion that capital gains should not be taxed. They are already taxed on the corporate level to some degree. My reasoning is the following: the markets are a zero sum game (really is a negative sum game thanks to the commissions). As such, when someone makes money, another person lost money. The IRS taxes me on the gains and gives a deduction to the guy who lost money. So in essence, the IRS does not makes any money! The only reason the make money is because the put a cap of $3,000 on the losses you can deduct, while leaving no cap on the gains. That is the definition of unfair. At the least, the cap should be increased to $10,000 on the losses. Nowadays any fool can lose 10k in a year. And it would take 4 years of filing returns to deduct those loses. I am for minimizing my investment taxes. That's why I love the Roth IRA. If there's more legal ways to pay 0% on investments, count me in.

Yes this is legal, a good strategy, and there is nothing unethical about it. Typically you would ask your parents to open a brokerage account with your broker, then send the broker a gift letter with a signature guarantee.

are you an only child? if so, keep gifting to them until they die. step-up basis means if you sell at the time they die, you pay no tax, althoguh if their estate is over the estate tax threshold then you'd pay estate tax on it..

hebron1427 said:   are you an only child? if so, keep gifting to them until they die. step-up basis means if you sell at the time they die, you pay no tax, althoguh if their estate is over the estate tax threshold then you'd pay estate tax on it..

This is actually a great alternative. The only problem I see with it is that I would have to gift them "forever" stocks. That is, stocks that once I gift to them, they keep in the account and never sell. If they do sell, then they will incur in very high capital gains tax (currently 20% in Puerto Rico). My parents are actually fond of the idea of moving to Florida. That would be great for this strategy as they would not be tied to that high capital gains tax and Florida has not state tax!

I don't think their estate would go over the $5M or $1M. I actually like this strategy. I would inherit the account free of estate tax and an increase in cost basis. I actually have siblings, but I guess this can be setup in a will so as to not cause any problems. Thanks for the suggestions. FWers always surprise me

noelandres said:   hebron1427 said:   are you an only child? if so, keep gifting to them until they die. step-up basis means if you sell at the time they die, you pay no tax, althoguh if their estate is over the estate tax threshold then you'd pay estate tax on it..

This is actually a great alternative. The only problem I see with it is that I would have to gift them "forever" stocks. That is, stocks that once I gift to them, they keep in the account and never sell. If they do sell, then they will incur in very high capital gains tax (currently 20% in Puerto Rico). My parents are actually fond of the idea of moving to Florida. That would be great for this strategy as they would not be tied to that high capital gains tax and Florida has not state tax!

I don't think their estate would go over the $5M or $1M. I actually like this strategy. I would inherit the account free of estate tax and an increase in cost basis. I actually have siblings, but I guess this can be setup in a will so as to not cause any problems. Thanks for the suggestions. FWers always surprise me


i learned this from a man who i greatly respected who died recently. it was not this exact scenario, but instead he had depreciated his personal residence--which you would never do otherwise because of the exemptions for gains on personal residence. in his case, though, he took depreciation on his home to get write-off of his taxes, knowing it would be the last home he ever owned. he died a few years ago. although his wife is still there, she will likely live in the house until her death, which could be another 10 years but, nonetheless...the step-up basis means he got the benefit of depreciation in current year without the repayment at time of sale because there was no sale--the basis will be stepped up for the heirs.

very smart man--as i said, i respected him greatly.



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