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!