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A Strategy That May Save You Thousands in Taxes This Year

As financial planners, one of the things we really love to do is tax planning.  Believe it or not, we find that stuff really exciting!  So as we think about ways to manage our taxes here in 2020, we’ve got a strategy that you may want to consider.

It’s got some potentially wonderful advantages if you’re in a fairly high tax bracket, AND you’d like to gift some money to someone who’s in a much lower bracket.  We’re thinking maybe parents who want to gift money to their kids who are in their early to mid-twenties and who want to buy a home – but any similar situation may work.

So let’s say you have two kids who are out of college and just getting started in their careers.  They both expect to make around $40,000 this year.  And maybe you’ve got some stock that you’ve owned for several years that’s got some nice appreciation – let’s imagine in a hypothetical situation that you paid $5,000 for it a long time ago and it’s now worth $20,000 – a $15,000 gain… Nice!

Okay – you could just sell the $20,000 of stock and then give the kids a cash gift of $10,000 each, but you’re a little concerned about the taxes you’d might have to pay on that $15,000 gain in your relatively high tax bracket.  That’s a valid concern.

So maybe you should try this: don’t sell the stock, but rather, make a $10,000 gift of the stock to each of the kids instead.  You do what’s called an “in kind” transfer of the shares.  Now they own the stock with your original tax basis, and each has a $7,500 capital gain.  They sell the stock themselves, and pocket the proceeds.  They’d each report that $7,500 capital gain on their tax return, but they would not likely have to pay any federal capital gains taxes.

Why?  Because their income, including the $7,500 of gain, puts them in the 12% marginal ordinary income tax bracket, which, under current law, basically comes with a zero-percent long-term capital gains rate.  If you’d sold it yourself in, say, the 22% or higher marginal bracket, you would’ve paid around $2,250 or more in federal capital gains taxes.  This way, your kids get the money and no federal taxes would be due.  Oh – and no gift taxes, either, since the gift didn’t exceed the $15,000 per-beneficiary annual exclusion amount.

One more thing here: if you liked the stock and preferred to keep it, you could simply buy $20,000 worth of that same stock right away with the cash you’d originally intended to give to the kids… Now you’d own the stock as before, but you’d have it at the higher tax basis of $20,000 in this example.

Isn’t that great?  We TOLD you tax planning is fun!  If you need help with your tax strategies and tax management, give us a call here at Lucia Capital Group, and we’ll get to work on it. It’s what we do – and we’re always here to help!

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy (including the investments purchased and/or investment strategies devised by LCG) will be either suitable or profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal. Accordingly, no client or prospective client should assume that the presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from LCG or from any other investment professional.

Case studies are hypothetical, are for illustrative purposes only, are not guaranteed and subject to potential federal and state law amendments. There is no guarantee that you will achieve the results discussed or illustrated.

Rick Plum is a registered representative of, and offer securities through, Lucia Securities, LLC, a registered broker/dealer, member FINRA/SIPC. Advisory services offered through Lucia Capital Group, a registered investment advisor, and an affiliate of Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.

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