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A Tax Strategy That Could Save You Thousands of Dollars

Did you ever think that tax management could be fun? Probably not. Our team is comprised with people whom really enjoy figuring out ways to strategize on taxes. And as we make our way through this year’s tax season, we wanted to pass along a strategy that you might want to consider sometime this year. 

It’s got some potentially wonderful advantages for people who find themselves in at least a moderately high tax bracket, AND who know of someone who’s in a much lower bracket that they’d like to gift some money to.  A good example of that might be parents who’d like to give money to their kids who are maybe in their early to mid-twenties and are looking to buy a home – but any similar situation like this may work. 

Here’s how it goes: let’s say you have two kids who are out of college and just getting started in their careers.  Both of those kids expect to make around $45,000 this year.  And maybe you’ve got some shares of stock that you’ve owned for several years with some pretty good appreciation. In our hypothetical situation, we’ll imagine that you paid $5,000 for this stock a long time ago and it’s grown over the years to now be worth $20,000 – that’s a $15,000 gain… Nice! 

Since you’re looking to gift the two kids some money, you have a couple of options here: you could just sell the $20,000 of stock and then give the kids a cash gift of $10,000 each, but in your case, you’ll have to pay capital gains taxes on that $15,000 gain, and you’ll have to do so in your relatively high tax bracket. That could be anywhere from 15 to 20 percent or more, depending on your income. That’s not an ideal option. 

Maybe you should try this: don’t sell the stock yourself, 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.  This way, they both own the stock with your original tax basis, meaning that each of them has $10,000 of stock with $7,500 of built in capital gain.  They would then sell the stock themselves, pocket the proceeds, and use the cash for whatever they need.   

Of course, they’d each have to report that $7,500 capital gain on their tax return, but they would very likely not have to pay any federal capital gains taxes on the sale. 

Why?  Because their income in this example, 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.  In other words, they could sell the stock tax free.  

This tax-free sale is far better than if you had sold it yourself and you were in, say, the 22% or higher marginal bracket, because in that case, you would’ve paid at least $2,250 or more in federal capital gains taxes.  Gifting it to your kids and allowing them to sell it means that they get the money without having to pay any federal income taxes.  Oh – and there would be no gift tax issues, either, since the gift didn’t exceed the $17,000 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!  It’s all about managing what you can, and taking advantage of what the tax code allows. We strategize with our clients every single day at Lucia Capital Group, and if you need help with managing your taxes, or with anything else, just schedule an appointment. As always, we’re 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. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

Examples cited 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.

No client or prospective client should assume that this information, or any component thereof, serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group or from any other investment professional.

Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

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