Giving the gift of stock can be a great tool to transfer wealth. One thing to note is that your cost basis will carry over for tax purposes when they sell the stock. If they were to inherit the stock, then they would get a step up in basis, potentially saving taxes assuming there is growth in the stock. Another great strategy is to donate highly appreciated stocks to charity. You not only do not have to pay the capital gains taxes, but you also get a tax deduction for the contribution. Utilizing a donor advised fund to contribute the appreciated stock would allow for you to use the proceeds to benefit many different charities.
Yes, you can give stock as a gift. It can be a great way to encourage an interest in investing to a younger generation. You can contact your brokerage firm to obtain the paperwork to make the gift transfer. However, the bigger question is should you give stock as a gift? The answer revolves around taxes and the use of the gift.
Let’s start with a simple counter example. You decide that you want to give your niece a gift and you write her a check for $14,000. In this case of giving cash, as long as your check is below the annual gift tax exclusion amount of $14,000 for 2016, then there are no tax considerations. Your niece can do anything she wants with the cash, including pay off credit card debt, pay school tuition or investing in stock without paying additional taxes.
However, suppose you also own $14,000 worth of FaceBook, Inc. stock (FB) that you purchased for $10,000 more than a year ago. Your gain in the stock is $4,000, also known as a capital gain, while your cost basis, the purchase price, is $10,000. You decide to give this stock to your niece instead of writing her a check.
She is happy to get the gift. But if she really needs the cash instead and wants to pay off debt or pay school tuition with your gift, she will have to sell the stock, and there’s the rub. The IRS is very interested in the capital gain amount realized because whenever the stock is sold, the current owner will owe a capital gains tax on the $4,000 capital gain.
Federal capital gains tax rates for 2016 are 0%, 15%, or 20% with a possible extra 3.8% Medicare surtax is added on to the top rate. When this stock is sold, a federal capital gains tax will be due of one of $0, $600, $800 or $952 depending on the seller’s capital gains tax bracket. If your niece is in the 15% bracket (a single filer making between $37,650 and $91,150 in 2016), she will only net $13,400 after she pays the $600 in taxes.
You have avoided paying capital gains taxes but have passed on a potential tax bill to your niece. The good news is that if your niece is in a lower tax bracket than you are in, the overall taxes paid will be less. But the bad news is that you gave her $600 less than it appeared.
Therefore, if your niece needs the money and will only sell the gift stock, give her the cash instead, to avoid capital gains taxes and commissions. But if you are certain that she will hold onto the stock, purchase brand new stock and transfer it to her. By purchasing new stock, without a capital gain, you avoid passing on an additional tax liability as part of your gift.
Stocks, bonds or any other securities can be transferred as gifts. Giving the gift of stock also has benefits for the giver. If the stock has appreciated in value, the holder can avoid paying the capital gains tax by giving it as a gift. There are two methods in transferring the ownership of a stock, which depend on how it is currently being held.
If the stock is being held in certificate form, then transferring the physical stock will be required. The owner must endorse the stock by signing it in presence of a guarantor, which can be their bank or broker. There may also be a form on the back of the certificate, which relate to the transferring of ownership. After the certificate is filled out and signed, it will be rendered non-negotiable and become transferable. There are also websites, like Oneshare.com, who specifically sell shares of stock that you can gift to people.
Often though, there will not be a physical copy of the stock, as many investors own the electronic version, which stored in a brokerage account. To gift his stock, the owner should gather the brokerage account information of the party they are gifting. The next step is to contact the gifter's broker, pass on the new account information, and order the electronic transfer to the other party.
For more information on stock transfers, read How Does Someone Actually Transact Securities?
You absolutely can gift stocks to anyone, but here are some cautions. If you’re in a high tax-bracket, by giving stocks from a brokerage account or a taxable account, in which prices have increased quite bit, to a lower-tax bracket family member, you transfer a lesser tax burden to them. On the other hand, if that low-tax bracket recipient is your child who is about to head to or currently are in college, your action may jeopardize their chance for the financial aid.
Moreover, there’s a special “Kiddie tax” that you need to watch out for. For 2016, children under the age of 19 and college students under the age of 24, who have unearned income (interest, dividends and capital gains) will be taxed at the parents’ rate once their unearned income is about $2,100. Their first $1,050 unearned income as a child or college student can be offset by the $1,050 standard deduction (assuming the child has no earned income), the next $1,050 of such unearned income will be taxed at the child’s tax rate, and above that, it’s treated as they had the same tax rate as their parents’.
So, be careful and consult with a professional before the transfer. Cheers!
Yes! However, your cost basis follows the stock to whomever receives it. They will owe capital gains taxes if they then sell the holding. Stock is subject to gifting limits as well.