Transfer money to family members to take advantage of lower tax rates

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schrute
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Transfer money to family members to take advantage of lower tax rates

Post by schrute » Sun Jan 21, 2018 9:04 pm

I know you can give money away up to $14K per person tax free. After that you start paying gift tax. I also know there's a $5 million lifetime limit as well.

Can you give a family member, say $1M, to take advantage of their lower tax bracket? Does that trigger a gift tax? Can the lifetime limit be used up all at once?

Has anyone done this?

Gill
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Re: Transfer money to family members to take advantage of lower tax rates

Post by Gill » Sun Jan 21, 2018 9:09 pm

schrute wrote:
Sun Jan 21, 2018 9:04 pm
I know you can give money away up to $14K per person tax free. After that you start paying gift tax. I also know there's a $5 million lifetime limit as well.

Can you give a family member, say $1M, to take advantage of their lower tax bracket? Does that trigger a gift tax? Can the lifetime limit be used up all at once?

Has anyone done this?
The lifetime limit is now over $11 million and you can give away all that much in one shot with no tax involved. The annual exclusion is now $15,000.
Gill

schrute
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Re: Transfer money to family members to take advantage of lower tax rates

Post by schrute » Sun Jan 21, 2018 9:13 pm

Gill wrote:
Sun Jan 21, 2018 9:09 pm
schrute wrote:
Sun Jan 21, 2018 9:04 pm
I know you can give money away up to $14K per person tax free. After that you start paying gift tax. I also know there's a $5 million lifetime limit as well.

Can you give a family member, say $1M, to take advantage of their lower tax bracket? Does that trigger a gift tax? Can the lifetime limit be used up all at once?

Has anyone done this?
The lifetime limit is now over $11 million and you can give away all that much in one shot with no tax involved. The annual exclusion is now $15,000.
Gill
So I can gift $1 million (used for illustrative purposes here) worth of stock to a family member at the 0% tax bracket, they could sell it, saving on the taxable gains, and then gift that back to me? I imagine I need to gift a form for that so it doesn't trigger tax.

jebmke
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Re: Transfer money to family members to take advantage of lower tax rates

Post by jebmke » Sun Jan 21, 2018 9:16 pm

schrute wrote:
Sun Jan 21, 2018 9:13 pm
Gill wrote:
Sun Jan 21, 2018 9:09 pm
schrute wrote:
Sun Jan 21, 2018 9:04 pm
I know you can give money away up to $14K per person tax free. After that you start paying gift tax. I also know there's a $5 million lifetime limit as well.

Can you give a family member, say $1M, to take advantage of their lower tax bracket? Does that trigger a gift tax? Can the lifetime limit be used up all at once?

Has anyone done this?
The lifetime limit is now over $11 million and you can give away all that much in one shot with no tax involved. The annual exclusion is now $15,000.
Gill
So I can gift $1 million (used for illustrative purposes here) worth of stock to a family member at the 0% tax bracket, they could sell it, saving on the taxable gains, and then gift that back to me? I imagine I need to gift a form for that so it doesn't trigger tax.
First of all, they would blow through the zero bracket quickly. Second, what you are describing is a sham transaction and would be ignored by the IRS.
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123
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Re: Transfer money to family members to take advantage of lower tax rates

Post by 123 » Sun Jan 21, 2018 9:19 pm

schrute wrote:
Sun Jan 21, 2018 9:13 pm
...So I can gift $1 million (used for illustrative purposes here) worth of stock to a family member at the 0% tax bracket, they could sell it, saving on the taxable gains, and then gift that back to me? I imagine I need to gift a form for that so it doesn't trigger tax.
Yes and when they gift it back to you they do a corresponding gift tax form eating up some of their own lifetime allowance. Do it enough and the gift/estate tax will exceed the capital gains tax you would have paid if you sold it yourself.

Edited to add:
Using up the gift allowance also reduces the size of your tax-free estate since the government gets their cut then as well. It's probably best to try this with someone who would otherwise never inherit anything from you so it doesn't cut into their subsequent estate. Who do you trust?
Last edited by 123 on Sun Jan 21, 2018 9:23 pm, edited 1 time in total.
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Gill
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Re: Transfer money to family members to take advantage of lower tax rates

Post by Gill » Sun Jan 21, 2018 9:22 pm

Oh, you didn’t tell us the rest of the story! No, that won’t fly. Read about the step transaction doctrine. The IRS would treat it as if you sold the stock.
Gill

miamivice
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Re: Transfer money to family members to take advantage of lower tax rates

Post by miamivice » Sun Jan 21, 2018 9:24 pm

It doesn't work that way.

You can read up on IRS publications to see why.

schrute
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Re: Transfer money to family members to take advantage of lower tax rates

Post by schrute » Sun Jan 21, 2018 9:29 pm

miamivice wrote:
Sun Jan 21, 2018 9:24 pm
It doesn't work that way.

You can read up on IRS publications to see why.
Got it, okay, makes sense. I couldn't imagine it would fly. Any section of the IRS bulletin?

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Re: Transfer money to family members to take advantage of lower tax rates

Post by Gill » Sun Jan 21, 2018 9:36 pm

Google “step transaction doctrine”
Gill

Nate79
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Re: Transfer money to family members to take advantage of lower tax rates

Post by Nate79 » Sun Jan 21, 2018 9:54 pm

Classic tax fraud.

Gill
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Re: Transfer money to family members to take advantage of lower tax rates

Post by Gill » Sun Jan 21, 2018 9:59 pm

Nate79 wrote:
Sun Jan 21, 2018 9:54 pm
Classic tax fraud.
I don’t think he was proposing tax fraud but thought he had discovered a clever loophole.
Gill

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Raymond
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Re: Transfer money to family members to take advantage of lower tax rates

Post by Raymond » Sun Jan 21, 2018 10:01 pm

jebmke wrote:
Sun Jan 21, 2018 9:16 pm
First of all, they would blow through the zero bracket quickly. Second, what you are describing is a sham transaction and would be ignored by the IRS.
OP, the recipient of the gift inherits your cost basis for capital gains purposes.

If I understand it correctly, let's say you gifted stock worth $1,000,000 today, but your cost basis was $200,000.

If the recipient then sells the stock immediately, his capital gains will be $800,000, and *poof*, now he'll pay a 20% long-term capital gain rate (if the donor had bought the stock over a year ago), or worse, he's now in the 37% Federal income tax bracket (if the donor had bought the stock less than one year ago) :twisted:

Someone tell me if I have this wrong.

If you want the recipient to have the stepped-up cost basis, you will have to arrange to be dead yourself, which I think is an extreme method of avoiding capital gains taxes.

-----

Others have already addressed the step transaction doctrine.
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dodecahedron
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Re: Transfer money to family members to take advantage of lower tax rates

Post by dodecahedron » Sun Jan 21, 2018 10:13 pm

That said, there are legal ways to do exactly what the subject line proposes, if you truly intend an actual bona fide gift rather than the sham gift the OP proposed above.

Suppose you were planning to make a generous cash graduation gift or wedding gift to a beloved young adult child who is still in a low tax bracket. Give them appreciated securities instead of cash--and throw in a tutorial on tax gain harvesting, bearing in mind that they may want to spread the gain realization over several years. (And you will want to watch out for gotchas! if your intended gift recipients will be applying for financial aid or other AGI income-contingent benefits, such as premium tax credits or earned income tax credit. Bear in mind that your intended recipients may face effective marginal tax rates much higher than yours, due to credit phaseouts, not to mention potentially devastating cliff effects.)

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Re: Transfer money to family members to take advantage of lower tax rates

Post by Katietsu » Sun Jan 21, 2018 10:33 pm

Also remember that the capital gains from selling the stock count towards the AGI and the taxable income. The taxable income determines the tax rate for capital gains. So, let’s say you gifted $200,000 in stock with a basis of $100,000 to a single person taking the standard deduction in 2018 who otherwise had $0 income. That person then sold it all in 2018. Only $50600 would be at the 0% Tax rate. The remaining $49,400 would be taxed at 15%. If that person had any other income, ie wages, pension, interest, then the amount of capital gains taxed at 15% would be even greater. The person might also lose out on credits making the effective tax rate even greater.

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Re: Transfer money to family members to take advantage of lower tax rates

Post by LadyGeek » Sun Jan 21, 2018 10:34 pm

I want to address several comments related to gifting. For the record, discussions of dishonest behavior or bypassing the law are totally unacceptable.

The intent is to understand how to do this within the existing legal framework; in which case this discussion can continue.

Everything is a matter of degree. The choice of using a tax deferred account, e.g. IRA, to avoid taxes during some period of time is one extreme, managing assets to qualify for Medicaid is the other. Gifting assets to avoid taxes is somewhere in the middle. The bottom line is to work within the legal framework. Ethics is the ever present elephant in the room.

The approach is to educate members on how to do things legally. State your points in a factual manner. If the intent strays from this objective, please report the post and we'll investigate.
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Re: Transfer money to family members to take advantage of lower tax rates

Post by MathIsMyWayr » Mon Jan 22, 2018 12:23 am

I don't want to hijack the thread, but along a similar line and strictly within the boundaries of law and ethics in my mind, I have been thinking about gifting a small amount of stocks on special occasions. For example, wedding or graduation gifts to close relatives or acquaintances, of about several hundred dollars or a little less or more. I have company RSU's some of which have appreciated nicely over time and they have to be disposed of for diversification at appropriate times. What is the procedure and tax implications of giving RSU's instead of cash, both on me and the recipient? They are held at Fidelity. To me, it looks like killing two birds with a stone - reducing RSU's (by a minute amount) without high tax rate.

libralibra
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Re: Transfer money to family members to take advantage of lower tax rates

Post by libralibra » Mon Jan 22, 2018 2:04 am

dodecahedron wrote:
Sun Jan 21, 2018 10:13 pm
That said, there are legal ways to do exactly what the subject line proposes, if you truly intend an actual bona fide gift rather than the sham gift the OP proposed above.
Google "walton grat" to see how billionaires do it.

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Re: Transfer money to family members to take advantage of lower tax rates

Post by Nebster » Mon Jan 22, 2018 6:38 am

A number of folks were quick to jump to step transaction doctrine here, but the reality is that the OP's strategy is likely untested and the doctrine certainly may not apply. Indeed, there is nothing in particular to suggest that "balancing" capital gains across a family unit is any more or less ethical, appropriate, or acceptable to the tax court than applying a backdoor Roth conversion, holding vehicle assets in a Montana LLC, or aggressively characterizing business income as distribution versus wages. All of these are areas of uncertainty, some tested more than others -- and some, no doubt, attempted more than others! But dismissing the idea out of hand seems unmerited.

Here are some scenarios:

Scenario 1: Paul and his family have lots of assets and income. His sister, Alice, and her husband have zero income and struggle financially. Paul and his wife would like to make an annual gift to Alice's family to support them. This year, they decide to gift 4 x $15,000 = $60,000 to be fully exempt from gift tax. Paul could wire cash over, but he sends $60,000 worth of VTI with a LT basis of $20,000, instead. Alice sells the stock, pays no tax on the gains, and the family as a whole is way ahead.

[I don't think anyone would argue that this would be subject to transaction integration.]

Scenario 2: Paul's parents are retired and have a negligible income as well as some illiquid assets with substantial appreciation. Paul makes a nonbinding agreement with his folks to give them $60,000 each year as well, which they sell at a much lower effective gains rate and use to fund their lifestyle. The unwritten agreement is that the parents will rebalance the portion of the estate they will to Paul by the amount of the gifts, such that Paul and family are "made whole" one day.

[Here there is clearly intent, but it would be impractical if not impossible to show. Certainly, there is no binding contract between the parties, and the time between the original transactions and the final one might be decades. Tax court has affirmed valid independence of transactions on tax-advantage events with much shorter periods (12 months in one famous case, hours in another).

Moreover, it certainly seems rational for the family to optimize short term outcomes here: otherwise, Paul's parents might have to sell their house to pay their bills. (I know, this scenario is awfully contrived, but I'm trying to explore the idea.) Is this different if Paul's parents hold VTI as well?]

I have some more scenarios, but I'll stop here. The above are off-the-cuff, so I'm probably glossing over something obvious. Just food for thought.

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Re: Transfer money to family members to take advantage of lower tax rates

Post by wrongfunds » Mon Jan 22, 2018 11:19 am

OP, the recipient of the gift inherits your cost basis for capital gains purposes.

If I understand it correctly, let's say you gifted stock worth $1,000,000 today, but your cost basis was $200,000.

If the recipient then sells the stock immediately, his capital gains will be $800,000, and *poof*, now he'll pay a 20% long-term capital gain rate (if the donor had bought the stock over a year ago), or worse, he's now in the 37% Federal income tax bracket (if the donor had bought the stock less than one year ago) :twisted:

Someone tell me if I have this wrong.
Can somebody confirm this? Some of the later replies imply that the above interpretation is wrong. I do know that if instead of the "live" gift, if it were done as "dead" inheritance, there is definitely no capital gain tax. The cost basis gets stepped up once the giver leaves this world. Even though people always say death and taxes are unavoidable, here death makes taxes vanish!

Seriously, if the estate is valued at 5M and has securities and real estate with cost basis of $2M, doesn't the recipient of the estate gets $5M tax free? Isn't the cost basis is reset to 5M at the time of the transfer.

Please correct me as my understanding of gift, inheritance, taxes etc is quite primitive as I do not quite understand the underlying logic of allowing a huge loophole where the deferred taxes are eventually waived.

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Re: Transfer money to family members to take advantage of lower tax rates

Post by thangngo » Mon Jan 22, 2018 11:22 am

wrongfunds wrote:
Mon Jan 22, 2018 11:19 am
OP, the recipient of the gift inherits your cost basis for capital gains purposes.

If I understand it correctly, let's say you gifted stock worth $1,000,000 today, but your cost basis was $200,000.

If the recipient then sells the stock immediately, his capital gains will be $800,000, and *poof*, now he'll pay a 20% long-term capital gain rate (if the donor had bought the stock over a year ago), or worse, he's now in the 37% Federal income tax bracket (if the donor had bought the stock less than one year ago) :twisted:

Someone tell me if I have this wrong.
Can somebody confirm this? Some of the later replies imply that the above interpretation is wrong. I do know that if instead of the "live" gift, if it were done as "dead" inheritance, there is definitely no capital gain tax. The cost basis gets stepped up once the giver leaves this world. Even though people always say death and taxes are unavoidable, here death makes taxes vanish!

Seriously, if the estate is valued at 5M and has securities and real estate with cost basis of $2M, doesn't the recipient of the estate gets $5M tax free? Isn't the cost basis is reset to 5M at the time of the transfer.

Please correct me as my understanding of gift, inheritance, taxes etc is quite primitive as I do not quite understand the underlying logic of allowing a huge loophole where the deferred taxes are eventually waived.
Yes, this is correct. Your heir would inherit $5M (usually $10M when we count both spouses) at a step-up basis; and thus, there will be no capital gain at the date of inheritance. You must be careful not to gift your inheritance before you die. Leave it in the will.

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Re: Transfer money to family members to take advantage of lower tax rates

Post by Gill » Mon Jan 22, 2018 11:27 am

wrongfunds wrote:
Mon Jan 22, 2018 11:19 am
Seriously, if the estate is valued at 5M and has securities and real estate with cost basis of $2M, doesn't the recipient of the estate gets $5M tax free? Isn't the cost basis is reset to 5M at the time of the transfer.

Please correct me as my understanding of gift, inheritance, taxes etc is quite primitive as I do not quite understand the underlying logic of allowing a huge loophole where the deferred taxes are eventually waived.
Your understanding is correct. There have been movements in the past to eliminate this "loophole" by having carryover basis, i.e., a person inheriting assets would take the decedent''s original basis. There has always been considerable opposition to making this change in the law, primarily because of the difficulty of ascertaining a decedent's original basis. An example that is often given is that of a coin collection where each individual coin would have its own basis.

The idea of a stepped up basis originates from an attempt at fairness to compensate for an estate tax being paid on the assets. At one time the estate tax exemption was $60,000 and so it was quite easy to incur an estate tax. This is no longer the case but the stepped up basis concept remains in the law.
Gill

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Re: Transfer money to family members to take advantage of lower tax rates

Post by lazydavid » Mon Jan 22, 2018 11:36 am

MathIsMyWayr wrote:
Mon Jan 22, 2018 12:23 am
I have company RSU's some of which have appreciated nicely over time and they have to be disposed of for diversification at appropriate times. What is the procedure and tax implications of giving RSU's instead of cash, both on me and the recipient? They are held at Fidelity. To me, it looks like killing two birds with a stone - reducing RSU's (by a minute amount) without high tax rate.
Strictly speaking, you can't give away RSUs because you don't own them. RSUs are a promise to give you shares when certain criteria are met. What you actually have are shares that you have received as a result of the vesting of RSUs. As such, they are just appreciated shares, and the same rules apply as if you had purchased them for cash on the date they vested, whether you're selling them or giving them away.

wrongfunds
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Re: Transfer money to family members to take advantage of lower tax rates

Post by wrongfunds » Mon Jan 22, 2018 12:36 pm

I don't think I have received the answer to the original question. When appreciated assets are gifted away, what happens to the capital gains? Does the tax on it gets waived? I am asking about the "live" gift here. Is the concept similar to DAF that some of you are discussing lately aka way to legally avoid having to pay taxes on capital gains?

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HueyLD
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Re: Transfer money to family members to take advantage of lower tax rates

Post by HueyLD » Mon Jan 22, 2018 12:42 pm

Gifting before the donor is dead: the donee's basis is the same as the donor's basis or the FMV depending on the situation.

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

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Re: Transfer money to family members to take advantage of lower tax rates

Post by Jack FFR1846 » Mon Jan 22, 2018 1:34 pm

.....and then there are the states. 2 have gift tax. Several have estate taxes. Several have inheritance taxes. The levels on all of the state taxes are well below the federal levels so where you may think it's a loophole to gift below the lifetime federal limit, the state may clamp down on your money and demand their share.

https://taxfoundation.org/does-your-sta ... tance-tax/
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Re: Transfer money to family members to take advantage of lower tax rates

Post by thangngo » Mon Jan 22, 2018 1:45 pm

wrongfunds wrote:
Mon Jan 22, 2018 12:36 pm
I don't think I have received the answer to the original question. When appreciated assets are gifted away, what happens to the capital gains? Does the tax on it gets waived? I am asking about the "live" gift here. Is the concept similar to DAF that some of you are discussing lately aka way to legally avoid having to pay taxes on capital gains?
I thought Gill and I answered your question above. If you gift appreciated assets while you're alive, there would be no tax benefits. The person who receives your gifted shares will need to recognize capital gains when he or she sells the shares. The basis of the gifted shares is carry-over basis.

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Re: Transfer money to family members to take advantage of lower tax rates

Post by FoolMeOnce » Mon Jan 22, 2018 3:53 pm

Wrongfunds, you seem very confused. You need to read more about gifts, annual exclusions, and lifetime exemptions.

You can gift any amount you want at any time, cash or appreciated securities.

Gifts of securities carry with them the original cost basis. The recipient owes no taxes until he or she sells the assets, then will owe capital gains (assuming there is a gain).

In 2018, you can gift $15k from one person to another without having to report it to the IRS (up from 14k, if I'm not mistaken). This is the annual exclusion. It does not count against anything at any time.

The lifetime exemption just went up to $11.2 million for an individual estate.

A gift in a single year exceeding the annual exclusion counts against the lifetime exemption.

If you gift someone $1 million in stock with a $200k basis, nobody owes any taxes yet. You report the excess annual gift in your taxes and it reduces your remaining lifetime exemption. You keep reporting future gifts that exceed the annual exclusion (I'm not sure what happens once you hit the lifetime exemption while still alive).The basis carries over, though, and barring a crash of the stock value, the recipient will owe capital gains tax when the stock is sold.

As mentioned above, if instead of a gift while alive the stock passes at death, the basis steps up to the value at the time of death. There may then be gains from that new basis until the stock is sold.

wrongfunds
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Re: Transfer money to family members to take advantage of lower tax rates

Post by wrongfunds » Mon Jan 22, 2018 3:59 pm

I hope you don't mind me asking more questions.

So by donating appreciated shares, the donor has to reduce the lifetime exception by FMV but the receiver has to treat it as if he only received "tax-free gift" amount which is equivalent to the original cost rather than the FMV.

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Re: Transfer money to family members to take advantage of lower tax rates

Post by Not Law » Mon Jan 22, 2018 4:20 pm

The recipient of inherited stock get a stepped up basis because the actual value at the time of death is included in the deceased's estate for tax purposes. The "standard deduction" for the estate is now $11 million.

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Re: Transfer money to family members to take advantage of lower tax rates

Post by Gill » Mon Jan 22, 2018 5:15 pm

wrongfunds wrote:
Mon Jan 22, 2018 3:59 pm
So by donating appreciated shares, the donor has to reduce the lifetime exception by FMV but the receiver has to treat it as if he only received "tax-free gift" amount which is equivalent to the original cost rather than the FMV.
The donee doesn't have to anything other than keep a record of the donor's basis which the donee, in turn, will use as his basis when and if he sells it.

Yes, the donor reduces his lifetime exemption by the difference between the FMV of the gift and the annual exclusion. So if you give $100,000 FMV and the annual exclusion currently is $15,000 you have reduced your lifetime exemption by $85,000.

Keep in mind, unless your potential estate is approaching eight figures you really don't have to worry much about gifts and estate tax.
Gill

libralibra
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Re: Transfer money to family members to take advantage of lower tax rates

Post by libralibra » Mon Jan 22, 2018 8:32 pm

N.B. all this talk of carryover basis is only for gifts of appreciated property. If the FMV on the date you receive a gift is less than the owner's basis, then the rules are more complex when you sell: if the selling price is > basis, then you have a gain of price-basis. If price is < FMV, then you have a loss of price-FMV. If price is in between FMV and basis, then you have no gain and no loss.

(btw, this is so that you can't "gift away" capital losses.)

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Re: Transfer money to family members to take advantage of lower tax rates

Post by schrute » Sat Jan 27, 2018 10:33 am

Gill wrote:
Mon Jan 22, 2018 5:15 pm
wrongfunds wrote:
Mon Jan 22, 2018 3:59 pm
So by donating appreciated shares, the donor has to reduce the lifetime exception by FMV but the receiver has to treat it as if he only received "tax-free gift" amount which is equivalent to the original cost rather than the FMV.
The donee doesn't have to anything other than keep a record of the donor's basis which the donee, in turn, will use as his basis when and if he sells it.

Yes, the donor reduces his lifetime exemption by the difference between the FMV of the gift and the annual exclusion. So if you give $100,000 FMV and the annual exclusion currently is $15,000 you have reduced your lifetime exemption by $85,000.

Keep in mind, unless your potential estate is approaching eight figures you really don't have to worry much about gifts and estate tax.
Gill
So if I am reading this right, there's no taxes due when transferred at the FMV, only when the recipient sells?
Last edited by schrute on Sat Jan 27, 2018 12:21 pm, edited 1 time in total.

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Re: Transfer money to family members to take advantage of lower tax rates

Post by Gill » Sat Jan 27, 2018 11:17 am

schrute wrote:
Sat Jan 27, 2018 10:33 am
Gill wrote:
Mon Jan 22, 2018 5:15 pm
wrongfunds wrote:
Mon Jan 22, 2018 3:59 pm
So by donating appreciated shares, the donor has to reduce the lifetime exception by FMV but the receiver has to treat it as if he only received "tax-free gift" amount which is equivalent to the original cost rather than the FMV.
The donee doesn't have to anything other than keep a record of the donor's basis which the donee, in turn, will use as his basis when and if he sells it.

Yes, the donor reduces his lifetime exemption by the difference between the FMV of the gift and the annual exclusion. So if you give $100,000 FMV and the annual exclusion currently is $15,000 you have reduced your lifetime exemption by $85,000.

Keep in mind, unless your potential estate is approaching eight figures you really don't have to worry much about gifts and estate tax.
Gill
So if I am reading thi right, there's no taxes do (sic) when transferred at the FMV, only when the recipient sells?
Correct.
Gill

donall
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Re: Transfer money to family members to take advantage of lower tax rates

Post by donall » Sun Jan 28, 2018 10:37 am

Hah, did this with small amount of the individual stocks that we owned. Worked well with 3 stocks, but last stock went down in value. With gifted stocks, loss is limited, so would have been better to keep that stock.

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Re: Transfer money to family members to take advantage of lower tax rates

Post by gerntz » Sun Jan 28, 2018 10:46 am

Raymond wrote:
Sun Jan 21, 2018 10:01 pm
jebmke wrote:
Sun Jan 21, 2018 9:16 pm
First of all, they would blow through the zero bracket quickly. Second, what you are describing is a sham transaction and would be ignored by the IRS.
OP, the recipient of the gift inherits your cost basis for capital gains purposes.

If I understand it correctly, let's say you gifted stock worth $1,000,000 today, but your cost basis was $200,000.

If the recipient then sells the stock immediately, his capital gains will be $800,000, and *poof*, now he'll pay a 20% long-term capital gain rate (if the donor had bought the stock over a year ago), or worse, he's now in the 37% Federal income tax bracket (if the donor had bought the stock less than one year ago) :twisted:

Someone tell me if I have this wrong.

If you want the recipient to have the stepped-up cost basis, you will have to arrange to be dead yourself, which I think is an extreme method of avoiding capital gains taxes.

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Others have already addressed the step transaction doctrine.
Agree. It's what limits us from doing something like that on a smaller scale.

However, last year did gift $14K of zero basis cost stock to each of our low/zero income grandchildren from which they can take dividends & sell hares to the tune of $2100/yr & have zero income tax on that income.

gerntz
Posts: 461
Joined: Fri May 06, 2011 3:37 pm

Re: Transfer money to family members to take advantage of lower tax rates

Post by gerntz » Sun Jan 28, 2018 10:48 am

gerntz wrote:
Sun Jan 28, 2018 10:46 am
Raymond wrote:
Sun Jan 21, 2018 10:01 pm
jebmke wrote:
Sun Jan 21, 2018 9:16 pm
First of all, they would blow through the zero bracket quickly. Second, what you are describing is a sham transaction and would be ignored by the IRS.
OP, the recipient of the gift inherits your cost basis for capital gains purposes.

If I understand it correctly, let's say you gifted stock worth $1,000,000 today, but your cost basis was $200,000.

If the recipient then sells the stock immediately, his capital gains will be $800,000, and *poof*, now he'll pay a 20% long-term capital gain rate (if the donor had bought the stock over a year ago), or worse, he's now in the 37% Federal income tax bracket (if the donor had bought the stock less than one year ago) :twisted:

Someone tell me if I have this wrong.

If you want the recipient to have the stepped-up cost basis, you will have to arrange to be dead yourself, which I think is an extreme method of avoiding capital gains taxes.

-----

Others have already addressed the step transaction doctrine.
Agree. It's what limits us from doing something like that on a smaller scale.

However, last year did gift $14K of zero basis cost stock to each of our low/zero income grandchildren from which they can take dividends & sell shares to the tune of $2100/yr & have zero income tax on that income.

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