Gifting appreciated stock - loophole?

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Auro
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Gifting appreciated stock - loophole?

Post by Auro »

Hi there,

Here's my situation. My child (23) is starting a fulltime job in July and will have under $44k in income during the year. Is this strategy a possibility?

Me -> Gift him $18k in significantly appreciated stock (held for many years)
He -> Sells as soon as he gets this gift

Does that really mean that our (combined) tax liability will be zero, due to my avoiding taxes altogether, and him avoiding capital gains because of income limits? And separately, are the proceeds from the sale of stock added to his income? I.e., he actually needs to make less than $26k in W2 income during the year?

And to take that further, if he were to pay me (back?) $18K from his income over the course of time, would I essentially have sold my stock for $0 in capital gains?

Sure, the numbers are small, but the savings are still substantial.

Thanks,
Auro
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TomatoTomahto
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Re: Gifting appreciated stock - loophole?

Post by TomatoTomahto »

Auro wrote: Sat Jun 29, 2024 4:29 pm And to take that further, if he were to pay me (back?) $18K from his income over the course of time, would I essentially have sold my stock for $0 in capital gains?
That would be a step transaction and fraud. Dont involve your child in fraud. I don’t think that’s a lesson you’re hoping to teach.
I get the FI part but not the RE part of FIRE.
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Auro
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Re: Gifting appreciated stock - loophole?

Post by Auro »

TomatoTomahto wrote: Sat Jun 29, 2024 4:33 pm
Auro wrote: Sat Jun 29, 2024 4:29 pm And to take that further, if he were to pay me (back?) $18K from his income over the course of time, would I essentially have sold my stock for $0 in capital gains?
That would be a step transaction and fraud. Dont involve your child in fraud. I don’t think that’s a lesson you’re hoping to teach.
Had to Google "step transaction" to see what that means. Of course, no intent to commit fraud, wondered if it was an exploitable loophole.

Apparently not! "The idea behind the Step Transaction Doctrine is that with respect to certain transactions involving multiple parts and components — the individual parts will be treated together as a full transaction — and not as separate individual parts. It is invoked when the IRS believes Taxpayers may have engaged in a series of sham transactions — and that the separate parts to the transactions should not be treated separately — so that the Taxpayer can artificially reduce their tax bill — but rather a single transaction."

Thank you for that! Still wondering about the gifting piece that was in the earlier part of the post...
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retired@50
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Re: Gifting appreciated stock - loophole?

Post by retired@50 »

Auro wrote: Sat Jun 29, 2024 4:29 pm ...And separately, are the proceeds from the sale of stock added to his income?
Not the full sale proceeds, just the portion that represents capital gain are added to his income.

In other words, he gets your basis in the shares.

What I'm not certain about is whether he can treat it as a short term or long term gain...??? Since he only owned the shares for a short holding period.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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TomatoTomahto
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Re: Gifting appreciated stock - loophole?

Post by TomatoTomahto »

Auro wrote: Sat Jun 29, 2024 4:40 pm Thank you for that! Still wondering about the gifting piece that was in the earlier part of the post...
The gifting part of the transaction would reduce the amount of tax the family unit (ie, the sum of you and him) pays. Many people choose to gift appreciated shares to other people, and it’s a perfectly legal way to reduce total taxes. Remember, the important thing is that gifts can’t have strings attached.
I get the FI part but not the RE part of FIRE.
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Auro
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Re: Gifting appreciated stock - loophole?

Post by Auro »

retired@50 wrote: Sat Jun 29, 2024 4:45 pm
Auro wrote: Sat Jun 29, 2024 4:29 pm ...And separately, are the proceeds from the sale of stock added to his income?
Not the full sale proceeds, just the portion that represents capital gain are added to his income.

In other words, he gets your basis in the shares.

What I'm not certain about is whether he can treat it as a short term or long term gain...??? Since he only owned the shares for a short holding period.

Regards,
This part, I know the answer to :). The holding period is the sum of the holding periods of the donor and recipient.
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retired@50
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Re: Gifting appreciated stock - loophole?

Post by retired@50 »

Auro wrote: Sat Jun 29, 2024 4:51 pm
retired@50 wrote: Sat Jun 29, 2024 4:45 pm
Auro wrote: Sat Jun 29, 2024 4:29 pm ...And separately, are the proceeds from the sale of stock added to his income?
Not the full sale proceeds, just the portion that represents capital gain are added to his income.

In other words, he gets your basis in the shares.

What I'm not certain about is whether he can treat it as a short term or long term gain...??? Since he only owned the shares for a short holding period.

Regards,
This part, I know the answer to :). The holding period is the sum of the holding periods of the donor and recipient.
This does indeed appear to be the case.

See link: https://www.investopedia.com/terms/g/gifted-stock.asp
Investopedia wrote: When gifting stock, the recipient assumes your cost basis and holding period. In other words, if you were to give a friend $12,000 worth of stock purchased five years earlier for $7,000, they would be liable to pay long-term capital gains taxes on a profit of $5,000 should they sell straightaway.
Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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illumination
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Re: Gifting appreciated stock - loophole?

Post by illumination »

It's the "he gives the money back to me" part that's the problem because it's not really a gift in the law's eyes if you have such an arrangement.

Otherwise, yes, you can gift someone appreciated assets and they pay their tax rate. In which case, it could mean they pay lower (or even zero) taxes on it.
HootingSloth
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Re: Gifting appreciated stock - loophole?

Post by HootingSloth »

As others have pointed out, this transaction would not be respected for tax purposes. In addition, a 20% penalty may apply under section 7701(o) when a taxpayer enters into a transaction that does not change in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and the taxpayer does not have a substantial purpose (apart from Federal income tax effects) for entering into the transaction.

Even if this transaction were respected for tax purposes, it (mostly) wouldn't work because the "kiddie tax" means that unearned income of a child over $2,600 in a year is taxable at the parent's tax rates.
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billfromct
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Re: Gifting appreciated stock - loophole?

Post by billfromct »

HootingSloth wrote: Sat Jun 29, 2024 5:27 pm As others have pointed out, this transaction would not be respected for tax purposes. In addition, a 20% penalty may apply under section 7701(o) when a taxpayer enters into a transaction that does not change in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and the taxpayer does not have a substantial purpose (apart from Federal income tax effects) for entering into the transaction.

Even if this transaction were respected for tax purposes, it (mostly) wouldn't work because the "kiddie tax" means that unearned income of a child over $2,600 in a year is taxable at the parent's tax rates.
But wouldn’t a 23 year old “child” assuming he just graduated from college, with a full time job, presumably providing over 1/2 his support, filing his own tax return, not be considered a dependent of the parent?

I don’t think he would still be a dependent & the kiddie tax wouldn’t apply.

I am not a tax expert or CPA, so I am sure someone more knowledgeable will correct me if I am wrong.

bill
HootingSloth
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Re: Gifting appreciated stock - loophole?

Post by HootingSloth »

billfromct wrote: Sat Jun 29, 2024 6:17 pm
HootingSloth wrote: Sat Jun 29, 2024 5:27 pm As others have pointed out, this transaction would not be respected for tax purposes. In addition, a 20% penalty may apply under section 7701(o) when a taxpayer enters into a transaction that does not change in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and the taxpayer does not have a substantial purpose (apart from Federal income tax effects) for entering into the transaction.

Even if this transaction were respected for tax purposes, it (mostly) wouldn't work because the "kiddie tax" means that unearned income of a child over $2,600 in a year is taxable at the parent's tax rates.
But wouldn’t a 23 year old “child” assuming he just graduated from college, with a full time job, presumably providing over 1/2 his support, filing his own tax return, not be considered a dependent of the parent?

I don’t think he would still be a dependent & the kiddie tax wouldn’t apply.

I am not a tax expert or CPA, so I am sure someone more knowledgeable will correct me if I am wrong.

bill
You are right, I missed the 23 years old part. The sham transaction and potential for economic substance penalties remain, but the kiddie tax wouldn't apply to a 23 year old child unless they are a full-time student.
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bongo
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Re: Gifting appreciated stock - loophole?

Post by bongo »

Auro wrote: Sat Jun 29, 2024 4:29 pm Here's my situation. My child (23) is starting a fulltime job in July and will have under $44k in income during the year. Is this strategy a possibility?
If his AGI is below about 61.6k this year, that's the gains from the stock sale + all his other income, then the fed tax on the stock sale will be zero.

You and spouse can give up to 36k using the annual gift tax exclusion, so figure out how much son will earn and then find some stock with low enough basis that will make the numbers work.

Ask him to use it to fully fund his Roth 401k (if the company allows a big enough % to be withheld) and Roth IRA.
toddthebod
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Re: Gifting appreciated stock - loophole?

Post by toddthebod »

billfromct wrote: Sat Jun 29, 2024 6:17 pm
HootingSloth wrote: Sat Jun 29, 2024 5:27 pm As others have pointed out, this transaction would not be respected for tax purposes. In addition, a 20% penalty may apply under section 7701(o) when a taxpayer enters into a transaction that does not change in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and the taxpayer does not have a substantial purpose (apart from Federal income tax effects) for entering into the transaction.

Even if this transaction were respected for tax purposes, it (mostly) wouldn't work because the "kiddie tax" means that unearned income of a child over $2,600 in a year is taxable at the parent's tax rates.
But wouldn’t a 23 year old “child” assuming he just graduated from college, with a full time job, presumably providing over 1/2 his support, filing his own tax return, not be considered a dependent of the parent?

I don’t think he would still be a dependent & the kiddie tax wouldn’t apply.

I am not a tax expert or CPA, so I am sure someone more knowledgeable will correct me if I am wrong.

bill
If the child graduated from college this year, he likely meets the "full time student" requirement as he was taking enough classes to graduate for at least five months. If his birthday already passed, he'd meet the "under 24" requirement. Of course he'll meet the required to file a tax return and $2,500 of unearned income requirements. The last is whether he earns enough to provide half his own support. That depends how much his tuition and room and board were for the last semester, since that counts as support. I guess the part that I'm not 100% sure about is if tuition is paid in December, does it count as 2023 or 2024 support for the support test.
Uniballer
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Re: Gifting appreciated stock - loophole?

Post by Uniballer »

Your kid will only be in the 0% capital gains rate if total taxable income for 2024 (including the capital gains) is under $47,025.
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FiveK
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Re: Gifting appreciated stock - loophole?

Post by FiveK »

Uniballer wrote: Sat Jun 29, 2024 6:36 pm Your kid will only be in the 0% capital gains rate if total taxable income for 2024 (including the capital gains) is under $47,025.
And taxable income = AGI - deductions. E.g., assuming the standard deduction, an AGI of $47,025 + $14,600 = $61,625.

But Auro, ditch the "hey, kid, pay me back" part. Either give it to him or don't.
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Re: Gifting appreciated stock - loophole?

Post by delamer »

You — or better yet, your son — can run his wage income only and then his wage income plus capital gains on the stock gift through tax software to estimate his difference in taxes owed.

We have been gifting stocks to our adult kids for several years. Sometimes they sell; sometimes they don’t.

We manage our stock sales carefully because we are at risk of incurring the NIIT. Even if our kids have to pay some capital gains taxes, the NIIT isn’t an issue for them.
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Re: Gifting appreciated stock - loophole?

Post by aspiringboglehead »

The discussion so far has been premised on a fundamental mistake about the way the tax code treats inter vivos gifts.

Between living individuals, the basis of appreciated gifts transfers from the donor to the recipient. So there is simply no loophole. There's no need to resort to the economic-substance rule or anything else. People may be getting confused about either (1) the stepped up basis for individuals at death or (2) the elimination of long-term capital gains when an individual makes a gift to a 501(c)(3) organization.

See for example https://www.irs.gov/faqs/capital-gains- ... f-home-etc.

EDIT: My apologies - Never mind! I was reading the thread too quickly.
Last edited by aspiringboglehead on Sat Jun 29, 2024 8:47 pm, edited 2 times in total.
toddthebod
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Re: Gifting appreciated stock - loophole?

Post by toddthebod »

aspiringboglehead wrote: Sat Jun 29, 2024 8:38 pm The discussion so far has been premised on a fundamental mistake about the way the tax code treats inter vivos gifts.

Between living individuals, the basis of appreciated gifts transfers from the donor to the recipient. So there is simply no loophole. There's no need to resort to the economic-substance rule or anything else. People may be getting confused about either (1) the stepped up basis for individuals at death or (2) the elimination of long-term capital gains when an individual makes a gift to a 501(c)(3) organization.

See for example https://www.irs.gov/faqs/capital-gains- ... f-home-etc.
You have completely misunderstood. This has nothing to do with stepped up basis. The premise of the plan is that one person is in the 15% or higher capital gains tax bracket, and the other is in the 0% capital gains bracket.
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Re: Gifting appreciated stock - loophole?

Post by aspiringboglehead »

toddthebod wrote: Sat Jun 29, 2024 8:44 pm You have completely misunderstood. This has nothing to do with stepped up basis. The premise of the plan is that one person is in the 15% or higher capital gains tax bracket, and the other is in the 0% capital gains bracket.
My apologies - I was reading the thread too quickly and indeed completely misunderstood; I've added a note to my post so that nobody should pay it any attention. (The transfer of basis for gifts is a topic where I've encountered a lot of confusion before, so I unduly anticipated it.)
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Re: Gifting appreciated stock - loophole?

Post by livesoft »

When our son was in this position, he reduced his AGI to get into the 0% tax bracket by contributing enough to his traditional 401(k), then he contributing to his Roth 401(k) since those contributions would not taxed. And then he contributed to his Roth IRA since the Roth 401(k) contribution was not removed from Box 1 of his W-2 he still had enough earned income to be eligible. In the end he put more than 100% of his partial year wages into his 401(k) and Roth.

The OP's son miight be able to do something similar.
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Re: Gifting appreciated stock - loophole?

Post by fyre4ce »

I tend to have a low tolerance for tax shenanigans.

I think it would be okay legally and ethically if you simply gave him the appreciated shares - gray area, but a light shade of gray. If he happens to sell them at a low or zero rate and gets a benefit, good for him. If you gift more than $36k/year ($18k from you and your spouse) you will need to file a gift tax return, but no taxes will be owed now.

When he gifts the money back to you, that’s when it crosses the line legally and ethically. That would be tax evasion by the step doctrine, and as others have pointed out, involving a child in tax fraud sends a very bad message.

Hope this helps.
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Re: Gifting appreciated stock - loophole?

Post by FiveK »

fyre4ce wrote: Sat Jun 29, 2024 9:31 pm I think it would be okay legally and ethically if you simply gave him the appreciated shares - gray area, but a light shade of gray.
No gray whatsoever on that step - all fine, and done by many in a similar situation.
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Re: Gifting appreciated stock - loophole?

Post by snowday2022 »

Agree it is tax fraud. Just curious: How does the IRS find out about these fraudulent transactions if the two family members are filing separate returns?
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FiveK
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Re: Gifting appreciated stock - loophole?

Post by FiveK »

snowday2022 wrote: Sat Jun 29, 2024 10:04 pm Agree it is tax fraud. Just curious: How does the IRS find out about these fraudulent transactions if the two family members are filing separate returns?
Assuming you are talking about the kid repaying the parent part, it is unlikely the IRS would notice - unless either gets hit with an IRS audit that includes the Bank Deposits and Cash Expenditures Method.

Of course, just because it's unlikely the IRS would notice doesn't make it right....
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Re: Gifting appreciated stock - loophole?

Post by SnowBog »

FiveK wrote: Sat Jun 29, 2024 9:34 pm
fyre4ce wrote: Sat Jun 29, 2024 9:31 pm I think it would be okay legally and ethically if you simply gave him the appreciated shares - gray area, but a light shade of gray.
No gray whatsoever on that step - all fine, and done by many in a similar situation.
Yep. And if the kid(s) are minors, you need to pay attention to the "kiddie tax" threshold when selling. I've used this to help filund college expenses using highly appreciated shares with minimal taxes (funds going into a UTMA).

But it's a "one way" gift. Once given, the money belongs to my child (I can manage it for them until they are the "age of majority" - but it's their money).
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Re: Gifting appreciated stock - loophole?

Post by doobiedoo »

Auro wrote: Sat Jun 29, 2024 4:29 pm .. My child (23) .. will have under $44k in income during the year. Is this strategy a possibility?
Me -> Gift him $18k in significantly appreciated stock (held for many years)
He -> Sells as soon as he gets this gift

A. Does that really mean that our (combined) tax liability will be zero..?
B. .. Are the proceeds from the sale of stock added to his income? I.e., he .. needs to make less than $26k in W2 income during the year?

And to take that further, if he were to pay me (back?) $18K from his income over the course of time, would I essentially have sold my stock for $0 in capital gains?
Yes, I gift ~$7k of appreciated stock/fund shares to my daughters each year.
The daughter with the $100k income just keeps the shares.
The daughter with the low[er] income sells her shares and pays no taxes. She reinvests the proceeds into a Roth IRA.

A. Yes.
B. Yes.

Don't do the re-gifting back to you. That is tax fraud.
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Re: Gifting appreciated stock - loophole?

Post by delamer »

FiveK wrote: Sat Jun 29, 2024 9:34 pm
fyre4ce wrote: Sat Jun 29, 2024 9:31 pm I think it would be okay legally and ethically if you simply gave him the appreciated shares - gray area, but a light shade of gray.
No gray whatsoever on that step - all fine, and done by many in a similar situation.
Absolutely. As long as there is no gifting of cash from any sale back to the parent, then it is a tax avoidance (legal) situation not tax evasion (illegal) situation.
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Re: Gifting appreciated stock - loophole?

Post by SnowBog »

delamer wrote: Sun Jun 30, 2024 10:17 am
FiveK wrote: Sat Jun 29, 2024 9:34 pm
fyre4ce wrote: Sat Jun 29, 2024 9:31 pm I think it would be okay legally and ethically if you simply gave him the appreciated shares - gray area, but a light shade of gray.
No gray whatsoever on that step - all fine, and done by many in a similar situation.
Absolutely. As long as there is no gifting of cash from any sale back to the parent, then it is a tax avoidance (legal) situation not tax evasion (illegal) situation.
+1

For context, the principal is similar to gifting appreciated shares to charities.

Instead of selling $18k of stocks, paying taxes on the gains (at your higher rates), and then donating an amount less than $18k... You can gift the entire $18k, and let the recipient - with potentially a lower tax bracket - keep more of the after-tax funds.

But much like with charities, it's no longer a "gift/donation" when you are getting/expecting something in return. That's where you step into tax evasion territory.
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Re: Gifting appreciated stock - loophole?

Post by delamer »

FiveK wrote: Sat Jun 29, 2024 11:08 pm
snowday2022 wrote: Sat Jun 29, 2024 10:04 pm Agree it is tax fraud. Just curious: How does the IRS find out about these fraudulent transactions if the two family members are filing separate returns?
Assuming you are talking about the kid repaying the parent part, it is unlikely the IRS would notice - unless either gets hit with an IRS audit that includes the Bank Deposits and Cash Expenditures Method.

Of course, just because it's unlikely the IRS would notice doesn't make it right....
Or legal.
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Re: Gifting appreciated stock - loophole?

Post by popoki »

What do you think is special about the amount of $18,000?
Gray doesn't matter.
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Re: Gifting appreciated stock - loophole?

Post by retired@50 »

popoki wrote: Sun Jun 30, 2024 12:56 pm What do you think is special about the amount of $18,000?
It's the annual gift exclusion amount for 2024.

See link: https://www.irs.gov/businesses/small-bu ... gift-taxes

Regards,
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Re: Gifting appreciated stock - loophole?

Post by popoki »

retired@50 wrote: Sun Jun 30, 2024 1:32 pm
popoki wrote: Sun Jun 30, 2024 12:56 pm What do you think is special about the amount of $18,000?
It's the annual gift exclusion amount for 2024.

See link: https://www.irs.gov/businesses/small-bu ... gift-taxes

Regards,
Of course but so many people wrongly seem to think that gifts beyond $18k are taxed. Just wondering why OP mentioned that amount.
Gray doesn't matter.
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Re: Gifting appreciated stock - loophole?

Post by retired@50 »

popoki wrote: Sun Jun 30, 2024 2:34 pm
retired@50 wrote: Sun Jun 30, 2024 1:32 pm
popoki wrote: Sun Jun 30, 2024 12:56 pm What do you think is special about the amount of $18,000?
It's the annual gift exclusion amount for 2024.

See link: https://www.irs.gov/businesses/small-bu ... gift-taxes

Regards,
Of course but so many people wrongly seem to think that gifts beyond $18k are taxed. Just wondering why OP mentioned that amount.
Probably as a way to avoid Form 709. Just a guess.

Regards,
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Re: Gifting appreciated stock - loophole?

Post by toddthebod »

popoki wrote: Sun Jun 30, 2024 2:34 pm
retired@50 wrote: Sun Jun 30, 2024 1:32 pm
popoki wrote: Sun Jun 30, 2024 12:56 pm What do you think is special about the amount of $18,000?
It's the annual gift exclusion amount for 2024.

See link: https://www.irs.gov/businesses/small-bu ... gift-taxes

Regards,
Of course but so many people wrongly seem to think that gifts beyond $18k are taxed. Just wondering why OP mentioned that amount.
Maybe OP is worth $10 million, or, with a household income of almost a half million a year, might have a taxable estate.
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Re: Gifting appreciated stock - loophole?

Post by HipCoyote »

I too am gifting appreciated shares that are legacy funds from when I had an AUM advisor to an adult child. My plan is to gift the shares, have the child sell them at some point and put that money towards Roth, reposition to a three fund portfolio, etc. I believe this is legal and ethical. The child will not be "gifting" anything back to me. They keep it all.

The act of the child giving back some of the money is where the fraud takes place.
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Re: Gifting appreciated stock - loophole?

Post by cas »

popoki wrote: Sun Jun 30, 2024 2:34 pm What do you think is special about the amount of $18,000?

[. . . some replies . . .]

Of course but so many people wrongly seem to think that gifts beyond $18k are taxed. Just wondering why OP mentioned that amount.

Quoting myself from another thread with a similar question (since I doubt you really care about OP's personal individual reasons in particular):
cas wrote: Wed May 29, 2024 7:28 am
drr1099 wrote: Wed May 29, 2024 6:46 am Still, I always wondered why many people are so careful not to exceed the annual limit since most of us will never even make a dent in that lifetime limit.
1. Record-keeping hassle: Form 709 (Gift Tax Return) is one of those pieces of paper that you have to keep "forever" (in a place other people, such as your executor, will easily find it).
  • You'll need it during your lifetime if another Form 709 needs to be filed in the future. (Post from just this week of someone getting bitten by this: viewtopic.php?p=7880898#p7880898 :
    [. . .] I would like to avoid having to deal with form 709. Not only was it a huge hassle before, you need to refer to prior years that have been filed and ours is missing from our own files. Turbo tax does not support the form so I have no electronic copy either.
  • Even if no estate tax is owed, your executor will need it if it is advisable to file for portability of the unused estate tax exemption after the death of the first spouse. (And filing for portability may be advisable at far, far lower estate values than the estate tax exemption amount. See this Boglehead's thread where bsteiner (estates and trusts attorney) and others do some back of the envelope calculations and came up with an estimate than maybe roughly 80% of estates where it would be advisable to file for portability apparently are not doing so.)
2. Living memory of the estate tax exemption being much lower, of it jumping around a lot, and of it perennially being under legislative discussion. (e.g., 25 years ago it was $650,000, which is well within a single generation's meeting-with-estate-planning-lawyers timeframe. During that same 25 years, the estate tax has also been entirely repealed and then brought back. I don't feel comfortable putting too much weight on assuming the estate tax exemption will be any particular number at some unknown point in the future.)

3. Individual state law considerations and experience of elderly relatives spending their last years in a state they never expected to live in (due to needing to move near a younger relative or other caretaker.)
JovaniBrown
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Re: Gifting appreciated stock - loophole?

Post by JovaniBrown »

Unfortunately, nowadays there are practically no convenient loopholes in the laws to circumvent taxes.
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TomatoTomahto
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Re: Gifting appreciated stock - loophole?

Post by TomatoTomahto »

JovaniBrown wrote: Mon Jul 08, 2024 5:22 pm Unfortunately, nowadays there are practically no convenient loopholes in the laws to circumvent taxes.
I pay my taxes. I don’t like loopholes, so I regard this as good news.
I get the FI part but not the RE part of FIRE.
ryman554
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Re: Gifting appreciated stock - loophole?

Post by ryman554 »

bongo wrote: Sat Jun 29, 2024 6:30 pm
Auro wrote: Sat Jun 29, 2024 4:29 pm Here's my situation. My child (23) is starting a fulltime job in July and will have under $44k in income during the year. Is this strategy a possibility?
If his AGI is below about 61.6k this year, that's the gains from the stock sale + all his other income, then the fed tax on the stock sale will be zero.

You and spouse can give up to 36k using the annual gift tax exclusion, so figure out how much son will earn and then find some stock with low enough basis that will make the numbers work.

Ask him to use it to fully fund his Roth 401k (if the company allows a big enough % to be withheld) and Roth IRA.
This also might be a situation where partially contributing to a trad IRA/401k might be advantageous if the donee AGI is ever so slightly above 61.6k
Harmanic
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Re: Gifting appreciated stock - loophole?

Post by Harmanic »

fyre4ce wrote: Sat Jun 29, 2024 9:31 pm I tend to have a low tolerance for tax shenanigans.

I think it would be okay legally and ethically if you simply gave him the appreciated shares - gray area, but a light shade of gray. If he happens to sell them at a low or zero rate and gets a benefit, good for him. If you gift more than $36k/year ($18k from you and your spouse) you will need to file a gift tax return, but no taxes will be owed now.

When he gifts the money back to you, that’s when it crosses the line legally and ethically. That would be tax evasion by the step doctrine, and as others have pointed out, involving a child in tax fraud sends a very bad message.

Hope this helps.
Never thought about this before. Is there a time limit for giving back. I assume that receiving a gift doesn't mean that the person can never give a gift to the giver again.
The question isn't at what age I want to retire, it's at what income. | - George Foreman
sailaway
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Re: Gifting appreciated stock - loophole?

Post by sailaway »

Harmanic wrote: Tue Jul 09, 2024 3:58 pm
fyre4ce wrote: Sat Jun 29, 2024 9:31 pm I tend to have a low tolerance for tax shenanigans.

I think it would be okay legally and ethically if you simply gave him the appreciated shares - gray area, but a light shade of gray. If he happens to sell them at a low or zero rate and gets a benefit, good for him. If you gift more than $36k/year ($18k from you and your spouse) you will need to file a gift tax return, but no taxes will be owed now.

When he gifts the money back to you, that’s when it crosses the line legally and ethically. That would be tax evasion by the step doctrine, and as others have pointed out, involving a child in tax fraud sends a very bad message.

Hope this helps.
Never thought about this before. Is there a time limit for giving back. I assume that receiving a gift doesn't mean that the person can never give a gift to the giver again.

It is in the intent. If you give expecting to receive it back, it isn't a gift.
Harmanic
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Re: Gifting appreciated stock - loophole?

Post by Harmanic »

sailaway wrote: Tue Jul 09, 2024 3:59 pm
Harmanic wrote: Tue Jul 09, 2024 3:58 pm
fyre4ce wrote: Sat Jun 29, 2024 9:31 pm I tend to have a low tolerance for tax shenanigans.

I think it would be okay legally and ethically if you simply gave him the appreciated shares - gray area, but a light shade of gray. If he happens to sell them at a low or zero rate and gets a benefit, good for him. If you gift more than $36k/year ($18k from you and your spouse) you will need to file a gift tax return, but no taxes will be owed now.

When he gifts the money back to you, that’s when it crosses the line legally and ethically. That would be tax evasion by the step doctrine, and as others have pointed out, involving a child in tax fraud sends a very bad message.

Hope this helps.
Never thought about this before. Is there a time limit for giving back. I assume that receiving a gift doesn't mean that the person can never give a gift to the giver again.

It is in the intent. If you give expecting to receive it back, it isn't a gift.
Ok. So you might give appreciated stock to a child as a wedding present and then the next year the child gives you a vacation in Aruba. That's all fine as long as they are completely separate with no strings attached.
The question isn't at what age I want to retire, it's at what income. | - George Foreman
fyre4ce
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Re: Gifting appreciated stock - loophole?

Post by fyre4ce »

Harmanic wrote: Tue Jul 09, 2024 4:02 pm
sailaway wrote: Tue Jul 09, 2024 3:59 pm
Harmanic wrote: Tue Jul 09, 2024 3:58 pm
fyre4ce wrote: Sat Jun 29, 2024 9:31 pm I tend to have a low tolerance for tax shenanigans.

I think it would be okay legally and ethically if you simply gave him the appreciated shares - gray area, but a light shade of gray. If he happens to sell them at a low or zero rate and gets a benefit, good for him. If you gift more than $36k/year ($18k from you and your spouse) you will need to file a gift tax return, but no taxes will be owed now.

When he gifts the money back to you, that’s when it crosses the line legally and ethically. That would be tax evasion by the step doctrine, and as others have pointed out, involving a child in tax fraud sends a very bad message.

Hope this helps.
Never thought about this before. Is there a time limit for giving back. I assume that receiving a gift doesn't mean that the person can never give a gift to the giver again.

It is in the intent. If you give expecting to receive it back, it isn't a gift.
Ok. So you might give appreciated stock to a child as a wedding present and then the next year the child gives you a vacation in Aruba. That's all fine as long as they are completely separate with no strings attached.
If there was an agreement, a discussion, or an understanding that the child would give the parent a gift back later, then neither were really gifts, but were rather part of a tax-evading transaction. It also raises the question of why this low-income child is gifting their high-income parents a vacation to Aruba when they could easily afford it on their own, and why the parents accepted the gift. The less plausible the story, the less likely it is to hold up in an audit. But otherwise, yes, if both were truly independent gifts then it would be legal.
afan
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Re: Gifting appreciated stock - loophole?

Post by afan »

What fire4ce said. The child making a large gift back to the parent would defeat the goal of transferring assets from parent to offspring. It would make far more sense for the parent to pay for the trip for the family.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
Harmanic
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Re: Gifting appreciated stock - loophole?

Post by Harmanic »

fyre4ce wrote: Tue Jul 09, 2024 4:44 pm
Harmanic wrote: Tue Jul 09, 2024 4:02 pm
sailaway wrote: Tue Jul 09, 2024 3:59 pm
Harmanic wrote: Tue Jul 09, 2024 3:58 pm
fyre4ce wrote: Sat Jun 29, 2024 9:31 pm I tend to have a low tolerance for tax shenanigans.

I think it would be okay legally and ethically if you simply gave him the appreciated shares - gray area, but a light shade of gray. If he happens to sell them at a low or zero rate and gets a benefit, good for him. If you gift more than $36k/year ($18k from you and your spouse) you will need to file a gift tax return, but no taxes will be owed now.

When he gifts the money back to you, that’s when it crosses the line legally and ethically. That would be tax evasion by the step doctrine, and as others have pointed out, involving a child in tax fraud sends a very bad message.

Hope this helps.
Never thought about this before. Is there a time limit for giving back. I assume that receiving a gift doesn't mean that the person can never give a gift to the giver again.

It is in the intent. If you give expecting to receive it back, it isn't a gift.
Ok. So you might give appreciated stock to a child as a wedding present and then the next year the child gives you a vacation in Aruba. That's all fine as long as they are completely separate with no strings attached.
If there was an agreement, a discussion, or an understanding that the child would give the parent a gift back later, then neither were really gifts, but were rather part of a tax-evading transaction. It also raises the question of why this low-income child is gifting their high-income parents a vacation to Aruba when they could easily afford it on their own, and why the parents accepted the gift. The less plausible the story, the less likely it is to hold up in an audit. But otherwise, yes, if both were truly independent gifts then it would be legal.
Just as an aside. I bought my parents their first cruise when I got my first job out of college (back in the day when cruising was still considered luxurious), even though I was low income and had little savings. It was a thank you for supporting me through college. It never had any tax consequences, so that was never an issue. But by your definition, my thank you gift was implausible because I had little and they had much. By the way, they accepted the gift and enjoyed the cruise.
The question isn't at what age I want to retire, it's at what income. | - George Foreman
fyre4ce
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Re: Gifting appreciated stock - loophole?

Post by fyre4ce »

Harmanic wrote: Tue Jul 09, 2024 8:09 pm Just as an aside. I bought my parents their first cruise when I got my first job out of college (back in the day when cruising was still considered luxurious), even though I was low income and had little savings. It was a thank you for supporting me through college. It never had any tax consequences, so that was never an issue. But by your definition, my thank you gift was implausible because I had little and they had much. By the way, they accepted the gift and enjoyed the cruise.
Sure. My claim was not that it’s impossible for a lower income child to give a gift to their higher income parents under reasonable circumstances. My point was that someone might look at the situation you described differently if your parents had recently gifted you a similar value of highly appreciated stock that you then sold at 0% capital gains tax rate.
Harmanic
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Re: Gifting appreciated stock - loophole?

Post by Harmanic »

fyre4ce wrote: Tue Jul 09, 2024 9:18 pm
Harmanic wrote: Tue Jul 09, 2024 8:09 pm Just as an aside. I bought my parents their first cruise when I got my first job out of college (back in the day when cruising was still considered luxurious), even though I was low income and had little savings. It was a thank you for supporting me through college. It never had any tax consequences, so that was never an issue. But by your definition, my thank you gift was implausible because I had little and they had much. By the way, they accepted the gift and enjoyed the cruise.
Sure. My claim was not that it’s impossible for a lower income child to give a gift to their higher income parents under reasonable circumstances. My point was that someone might look at the situation you described differently if your parents had recently gifted you a similar value of highly appreciated stock that you then sold at 0% capital gains tax rate.
I agree that someone should be careful of unintentionally creating the appearance of self-dealing, although it could happen if people are unaware of the rules. But then someone gifting appreciated stock is probably savvy enough to know.
The question isn't at what age I want to retire, it's at what income. | - George Foreman
bsteiner
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Re: Gifting appreciated stock - loophole?

Post by bsteiner »

The gift would be in trust rather than outright.
afan
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Re: Gifting appreciated stock - loophole?

Post by afan »

Harmanic wrote: Tue Jul 09, 2024 8:09 pm
Just as an aside. I bought my parents their first cruise when I got my first job out of college (back in the day when cruising was still considered luxurious), even though I was low income and had little savings. It was a thank you for supporting me through college. It never had any tax consequences, so that was never an issue. But by your definition, my thank you gift was implausible because I had little and they had much. By the way, they accepted the gift and enjoyed the cruise.
Different strokes. If my kids proposed to give me something expensive, I would thank them profusely and sincerely for the thought but decline the expenditure. Accepting would defeat the goal of moving money from us to them.

I also do not have much in the way of expensive things that I want, so buying the trip, or whatever, would be a complete waste of money. Another reason not to go along with an expensive gift.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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