Can I give stock as a gift?

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October 2016
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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.

Regards,

- Arden

September 2016
September 2016
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September 2016