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You may someday decide to give stocks to family members or a charitable organization. Before making such a gift, however, you’ll need to be aware of the tax considerations both for you and the recipient.
No. If the stock has appreciated in value, you can avoid paying the capital gains tax by giving the stock as a gift.
If you hold the shares in a brokerage account, you can simply re-title the shares in the name of the person to whom you want to gift the stock. You can even set up regular gifts at predetermined intervals. If you want to place restrictions on your gift, as might be the case when you’re giving stock to minors or young adults, you could set up a custodial account (commonly known as UTMA or UGMA) or work with your tax and legal advisors to establish a trust fund. Another way to gift stock is to transfer assets directly to your beneficiaries at the time of your death with a Transfer on Death Agreement (TOD).
If you donate appreciated stocks that you’ve held for more than a year to a “public” charity – such as a religious or an educational institution, or an organization that does medical research – you can typically take a tax deduction for the full fair market value of the stocks, up to 50% of your adjusted gross income for that year.
Recipients won’t be assessed taxes until they decide to sell the stocks you’ve given them. When valuing the gift for capital gains tax liability, recipients will need to know three things:
Example 1: You buy XYZ stock for $10 a share. The day you give the stocks to your loved one, XYZ is valued at $15 per share, $5 more than your original cost basis. If your loved one sells the stock, the cost basis will be your original cost, $10 per share.
If your loved one sells the stock at $25, he or she will be taxed on a gain of $15 per share. The tax will be assessed at the short- or long-term capital gains rate, depending on how long you owned the stock.
Example 2: You buy XYZ stock for $10 a share. The stock’s fair market value at the time of the gift is less than your original cost basis – for example, $8 per share. In this scenario, your loved one’s cost basis will depend on the price at the time he or she sells the stock.
Example 3: You buy XYZ stock for $10 a share and leave your shares to a loved one in your will. The day you pass away, the value of the stock is $15. If your loved one later decides to sell the stock, the cost basis will be $15 a share, the value of the stock on the day it was inherited.
If your loved one were to sell at $25, he or she will be taxed on a gain of $10 per share. The tax will be assessed at the more favorable long-term capital gains rate, regardless of how long you owned the stock. This means your loved one will pay capital gains tax on a lower amount, allowing him or her to keep more of your gift.
Set up an appointment with your Edward Jones financial advisor. Your financial advisor, working with your tax advisor and attorney, can provide you more information about how gifting stocks may benefit your individual situation.
You should consult your attorney or qualified tax advisor regarding your situation. This summarization should not be depended upon for other than broadly informational purposes. Specific questions should be referred to a qualified tax professional.
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