The Spokane River at sunset, in Spokane, Washington.


Gaining By Giving

If you have more income than you need and are searching for ways to minimize your taxes, you might consider gifting unneeded income-producing assets to relatives in lower tax brackets. This strategy usually lowers overall taxes and can remove some interest, dividends, and capital gains from your portfolio. If you are interested in gifting, however, you should be aware of the so-called kiddie tax, as well as the federal gift and estate tax rules.

Gifting Income-Producing Assets

Stocks, bonds, and real estate investment property are typical examples of income-producing assets. Gifting these assets to individuals in lower tax brackets can lower your taxable income and lower the overall amount of taxes paid. If you own a C corporation or an S corporation, for instance, you can make gifts of stock to your children in order to disburse or shift the dividends. The annual income from the stock would flow into your children's individual Form 1040 returns and be taxed at their rates.

If you don't own a business, it might still be advantageous for you to gift income-producing investment assets (e.g., stock in various companies) to your relatives. The initial distribution of shares to a relative would be classified as a gift, and the annual income from the gift would be taxed to your relative. You can currently make tax-free gifts of up to $15,000 per recipient under the annual gift tax exclusion. If you exceed the annual exclusion amount, you may owe gift tax; however, gift tax owed may be offset by your applicable exclusion amount, to the extent that is available.

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If gifting stock to children, you should be aware of the Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA). Some states don't allow securities to be registered in a minor's name. Basically, if you want to transfer an income-producing asset to a minor child, you have two choices: make the gift under the UTMA or UGMA, or make the gift in trust.

Tip: Family limited partnerships may also be worth considering. With this strategy, you'd transfer your income-producing assets to a limited partnership entity and gift away limited partnership interests to your relatives. Trusts also represent an opportunity for gifting income-producing assets.

Gifts and Tax Basis

When you make a lifetime gift, the recipient typically steps into your shoes as far as basis is concerned — this is known as a carryover basis. The tax basis of investments is important for capital gains tax purposes. To calculate your capital gain or loss upon the sale of stock, you normally subtract your adjusted basis in the stock from the fair market value (FMV) of the stock on the date of sale.

Example(s): Assume Kim gave 10 shares of ABC stock (during her lifetime) to her adult son, Tim. Kim had originally purchased the stock for $3,000. At the time of the gift, the stock had an FMV of $7,000. Tim's basis in the stock is a carryover one (i.e., it is $3,000, which was Kim's basis at the time of the transfer).

The Kiddie Tax

Special rules commonly referred to as the "kiddie tax" rules apply when a child has unearned income (for example, investment income). Children subject to the kiddie tax are generally taxed at the parents' tax rates on any unearned income over a certain amount. For 2020, this amount is $2,200 (the first $1,100 is tax free and the next $1,100 is taxed at the child's rate). The kiddie tax applies to: those under age 18, those age 18 whose earned income doesn't exceed one-half of their support, and those ages 19 to 23 who are full-time students and whose earned income doesn't exceed one-half of their support. You should keep the kiddie tax in mind if you are planning to shift income to your children.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


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