Gift Tax Exclusion


A

aturchin45

I want to give my son common stock, which has zero cost basis. The
gift tax exclusion is 12K.

Does 12K is the current value of the stock? Or is a gift of 14K which
after pays 15% cap gain tax equals around 12K. So really is the 12K
pretax or after tax?

Thanks, Alex
 
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B

Bill

(e-mail address removed) posted:
I want to give my son common stock, which
has zero cost basis. The gift tax exclusion is
12K.
Does 12K is the current value of the stock? Or
is a gift of 14K which after pays 15% cap gain
tax equals around 12K. So really is the 12K
pretax or after tax?
If you're giving him the stock, you will be transferring your basis
along with the shares -- i.e., zero -- and a contingent tax liability
for when he sells the stock. The "theoretical value" of your gift would
be the average market valuation on the day of transfer (or the closing
value on that date) -- without considering tax implications. This is an
interesting question -- because it appears to be a "tax-free" gift on
the face of it -- but it's really a gift which carries a tax liability
passed on to the recipient.

If you want to give him $12,000 -- the current limit, above which a
return (Form 709) would be required, then you could sell the stock and
give him the cash. (Of course, you would owe any tax obligation
incurred.) I believe that if the value of your stock on the day you
transfer it, exceeds $12,000, then this requirement would kick in.

Bill
 
B

Bill Brown

I want to give my son common stock, which has zero cost basis.  The
gift tax exclusion is 12K.

Does 12K is the current value of the stock?  Or is a gift of 14K which
after pays 15% cap gain tax equals around 12K.  So really is the 12K
pretax or after tax?
The current value of the stock is its fair market value on the date of
the gift. As the other Bill noted, the current value is the value used
for gift tax purposes. If you also gift your son the cash needed to
pay income tax on his sale of the stock (his basis would also be zero)
that dollar amount is added to the FMV of the stock to determine the
total gift.

Good luck.

Bill B
 
K

Kurt Ullman

Bill Brown said:
The current value of the stock is its fair market value on the date of
the gift. As the other Bill noted, the current value is the value used
for gift tax purposes. If you also gift your son the cash needed to
pay income tax on his sale of the stock (his basis would also be zero)
that dollar amount is added to the FMV of the stock to determine the
total gift.
Since the taxes would not need to be paid until April of the
following year, wouldn't it make more tax sense to give the stock now
and the cash to pay income taxes the next year? Then you would get
another round of the exclusion.
 
B

Bill Brown

   Since the taxes would not need to be paid until April of the
following year, wouldn't it make more tax sense to give the stock now
and the cash to pay income taxes the next year? Then you would get
another round of the exclusion.
Yep, it sure would.
 
R

removeps-groups

Yep, it sure would.
However, there would likely be penalties for paying tax late. That
is, tax on 12k of stock is about 1.8k at 15%, and if on April 15 of
next year you owe more than 1k there will likely be penalties for
paying tax late. To avoid the penalty you can make an estimated
payment (due dates are 4/15, 6/15, 9/15, 1/15) or equal estimated
estimated payments each of the 4 "quarters". It may also be possible
to avoid the penalty by taking advantage of prior year safe harbor,
increasing withholding at work, having other deductions such as
mortgage interest and IRA. In any case, the penalty is small --
probably under $100 here, but you'd have to check to be sure.

For gifts over 12k, any gift tax paid by the giver gets added in a
complicated manner to the cost basis of the stock, meaning that some
of that gift tax is recouped when you eventually sell.

There are also state tax issues to consider.
 
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B

Bill Brown

However, there would likely be penalties for paying tax late.  
There are safe harbors. If the kid had zero tax liability in the prior
year, the penalty for underestimating taxes would be zero.

The maximum marginal federal tax on a $12,000 LTCG is $1,800. The
maximum marginal underestimating penaly would be about $50-$60.
 
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R

removeps-groups

BTW, to be clear taxes are only due if you sell the stock.
The maximum marginal federal tax on a $12,000 LTCG is $1,800. The
maximum marginal underestimating penaly would be about $50-$60.
Yeah. The fee a professional tax preparer might charge to prepare
form 2210 Schedule AI (which allows you to pay a different amount of
estimated tax each "quarter" because your income varies during the
year), would almost certainly be more than $50, or $100. The cost to
do it on your own through Turbotax would be less, but then there would
as in the other case be the added time, cost of additional paperwork
(because all your income has to be tracked by quarter).
 

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