Gifting Appreciated Stock to College Student - 2018 version

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Magnetar
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Gifting Appreciated Stock to College Student - 2018 version

Post by Magnetar » Tue Jul 10, 2018 11:25 pm

Hi,
I am looking for some guidance in gifting some appreciated stock to my son college student.
His expenses are:
Tuition $8000
Room and board about $10000

He will have earned income of about $2500 and a $7500 student loan.

That seems to me to show he pays for more than 50% of his support. If this is true, I would like to donate some appreciated stock to him to cover the rest of his expenses. He would then sell the stock under his own tax rates and be able to apply AOTC to lower his taxes even more.

Does this make any sense?
Thanks
"Without discipline, no matter how good you are, you are nothing! One day, you're going to meet a tough guy who takes your best shot. Don't get discouraged. That's when the discipline comes in."

986racer
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Re: Gifting Appreciated Stock to College Student - 2018 version

Post by 986racer » Tue Jul 10, 2018 11:42 pm

It makes a lot of sense but you are incorrect that he is paying over half of his support. He’s actually not even close. His earned income is 2500 and his total support is at least 18000. So, he would need about 9000 of earned income to be providing his own support. Plus, he probably would need to be 24 years old or married.

Anyhow, provided that you were not going to claim AOTC for him, it doesn’t matter. If you have some highly appreciated stock, you could gift quite a bit for him, and with him claiming the AOTC, he could avoid the taxes.

There was a thread earlier that suggested around about 16K of capital gains (taxed at trust rates which is what happens with kiddie tax) would become about 2500 in tax liability. The $2500 AOTC credit would then offset that liability.

Katietsu
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Re: Gifting Appreciated Stock to College Student - 2018 version

Post by Katietsu » Wed Jul 11, 2018 12:15 am

The AOTC is a maximum of $2500. Of this, $1000 is available as a refundable credit.

If you son provides more than half of his support, he would claim his own AOTC. If he had potential tax liability, he could offset it with the AOTC credit.

However, if his tax liability was less than the potential credit, he would only be able to take advantage of receiving some of the credit as a refundable credit if his earned income was over half of his own support. This assumes the son is under 24.

See form 8863 instructions for more details.

Also, please be aware of the “kiddie tax” rules for 2018. Your son could be subject to these rates even if he was not a “dependent”.
Last edited by Katietsu on Wed Jul 11, 2018 11:45 am, edited 1 time in total.

47Percent
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Re: Gifting Appreciated Stock to College Student - 2018 version

Post by 47Percent » Wed Jul 11, 2018 9:08 am

You are absolutely on track.

Common sense tells me that the student loan should count towards his own support -- even though it is not "earned income". Because he is the one on the hook for repayment, it is essentially his money, although it is a loan.

A quick check confirmed my hunch. See below the link from H&R block website.

https://www.hrblock.com/tax-center/fili ... ependents/

Also, another poster had mentioned that your son needed to be 24 or married. I think that is incorrect. He only needs to be over 18, and not be claimed as a dependent on your return. He can also claim the AOTC credit.

check out the following article from forbes:

https://www.forbes.com/sites/troyonink/ ... 36758d6d15

It is a little dated (2013), but the essential facts remain the same.

Good luck..

Katietsu
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Re: Gifting Appreciated Stock to College Student - 2018 version

Post by Katietsu » Wed Jul 11, 2018 11:42 am

Ok. So the responses are getting a little confusing because there are so many different facts that can affect the tax calculations.

-How old will the son be on Dec 31?
-Will the son be a full time student for at least part of 5 months of the year?
-Would the parents qualify for the AOTC if the son was a dependent?
-How much capital gain would be associated with the gifted stock?
-Would the parents pay taxes on the capital gains otherwise? At what rate?


To clarify one point:
-There is a distinction between earned and unearned income. This does not matter for determining dependency (whatever that means under the new law.) However, it does affect whether or not the kiddie tax applies and it does affect whether or not any part of the AOTC is available as a refundable credit. This does not mean that gifting the stock is necessarily a bad idea with little earned income. It does mean a different calculation.

986racer
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Re: Gifting Appreciated Stock to College Student - 2018 version

Post by 986racer » Wed Jul 11, 2018 8:41 pm

There are a few things going on here...

First off, will your son be hit be the kiddie tax? From the reading that others have pointed out, the student loans could potentially put him over the 50% threshold. I say potentially, because the school only covers about 9 months of the year, and there would certainly be support costs for the remaining months. My guess is that he would be hit with the tax.

Next, can he claim the AOTC? As long as you don't claim him as a dependent (and is there any reason to under the 2018 law?), he can claim the AOTC.

As far as I can tell, even if he is hit with the kiddie tax while he claims the AOTC and you gift him highly appreciated stock (let's say you had a penny stock that is now worth a lot), and you give him the full remaining $8000 in this stock, you would still benefit highly from this plan...

Long term capital gains tax rates under kiddie tax
First 2600: 0%
Remaining 5400: 15% ($810)

So, he would get the capital gains tax free, and then also get $1K of refund from the AOTC. This would still be leaving some of the benefits of the AOTC on the table though. You could give another 8K of capital gains and he would still not have to pay any capital gains. Of course, giving that much would mean that he also wouldn't need the student loans.

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Magnetar
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Re: Gifting Appreciated Stock to College Student - 2018 version

Post by Magnetar » Wed Jul 11, 2018 9:48 pm

Katietsu wrote:
Wed Jul 11, 2018 11:42 am
Ok. So the responses are getting a little confusing because there are so many different facts that can affect the tax calculations.

-How old will the son be on Dec 31? [ He will be 21 ]
-Will the son be a full time student for at least part of 5 months of the year? [ Yes. ]
-Would the parents qualify for the AOTC if the son was a dependent? [. No ]
-How much capital gain would be associated with the gifted stock? [ about $8000. ]
-Would the parents pay taxes on the capital gains otherwise? At what rate? [Yes. 15% ]

To clarify one point:
-There is a distinction between earned and unearned income. This does not matter for determining dependency (whatever that means under the new law.) However, it does affect whether or not the kiddie tax applies and it does affect whether or not any part of the AOTC is available as a refundable credit. This does not mean that gifting the stock is necessarily a bad idea with little earned income. It does mean a different calculation.

Embedded my answers above. This is a little hard to do in a phone. Thanks for the help so far.
"Without discipline, no matter how good you are, you are nothing! One day, you're going to meet a tough guy who takes your best shot. Don't get discouraged. That's when the discipline comes in."

Katietsu
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Re: Gifting Appreciated Stock to College Student - 2018 version

Post by Katietsu » Thu Jul 12, 2018 7:40 pm

So, this is a little tricky because some of it is tied in to the new tax laws which I am only glancingly acquainted with.

By giving him up as a dependent, you would lose the $500 credit for dependents who are not eligible for the child tax credit.

On the other hand, the son could take advantage of the non refundable aspect of the AOTC. So even though he would be subject to the kiddie tax, his tax liability should be zero. If you paid the tax on the $8000 at 15%, you would owe $1200.

So, you would save $1200 in capital gain taxes but lose the $500 dependent credit.

You are leaving some of the AOTC unused. So you could consider gifting additional assets with capital gains to make the situation more favorable.

Note that the kiddie tax applies and the AOTC can not be used as a refundable credit (a credit that is greater than the tax liability). This is because a 21 year old full time student with at least one living parent must provide over 50% of their support through earned income to be in a position to have the most favorable tax treatment.

47Percent
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Re: Gifting Appreciated Stock to College Student - 2018 version

Post by 47Percent » Thu Jul 12, 2018 7:48 pm

Dear OP.

Please look at the Forbes article link I posted in a prior post. It looks like you would be an ideal candidate to use that strategy.

The $500 dependent tax credit you would be giving up will be dwarfed by the additional benefit your son would be reaping.

Nate79
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Re: Gifting Appreciated Stock to College Student - 2018 version

Post by Nate79 » Thu Jul 12, 2018 8:12 pm

Is the child going to school year round and no more living at home? The costs listed so far are only the costs for room and board for school. No mention if they are coming home in the summer.

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Magnetar
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Re: Gifting Appreciated Stock to College Student - 2018 version

Post by Magnetar » Thu Jul 12, 2018 8:29 pm

47Percent wrote:
Thu Jul 12, 2018 7:48 pm
Dear OP.

Please look at the Forbes article link I posted in a prior post. It looks like you would be an ideal candidate to use that strategy.

The $500 dependent tax credit you would be giving up will be dwarfed by the additional benefit your son would be reaping.
I will. Thanks.
"Without discipline, no matter how good you are, you are nothing! One day, you're going to meet a tough guy who takes your best shot. Don't get discouraged. That's when the discipline comes in."

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Magnetar
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Re: Gifting Appreciated Stock to College Student - 2018 version

Post by Magnetar » Thu Jul 12, 2018 8:31 pm

Nate79 wrote:
Thu Jul 12, 2018 8:12 pm
Is the child going to school year round and no more living at home? The costs listed so far are only the costs for room and board for school. No mention if they are coming home in the summer.
The child will be coming home for the summer.
"Without discipline, no matter how good you are, you are nothing! One day, you're going to meet a tough guy who takes your best shot. Don't get discouraged. That's when the discipline comes in."

47Percent
Posts: 345
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Re: Gifting Appreciated Stock to College Student - 2018 version

Post by 47Percent » Thu Jul 12, 2018 8:40 pm

Magnetar wrote:
Thu Jul 12, 2018 8:29 pm
47Percent wrote:
Thu Jul 12, 2018 7:48 pm
Dear OP.

Please look at the Forbes article link I posted in a prior post. It looks like you would be an ideal candidate to use that strategy.

The $500 dependent tax credit you would be giving up will be dwarfed by the additional benefit your son would be reaping.
I will. Thanks.
There is an updated version of the article. So you don't have to mentally translate for post TCJA scenario!

https://www.forbes.com/sites/troyonink/ ... kiddie-tax

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