Here are a few things to consider when making gifts of appreciated stock.
If you are gifting to a qualified charity, you get a deduction for the fair market value of the stock even though your basis (cost) is less than the current value. When the charity sells the stock, there are no taxes due since qualified charities pay no taxes on contributions they receive. This is a win-win for both parties since the donor also pays no taxes on the appreciated value of the stock.
If you are making a gift to an individual, the rules are different. The person who receives your gift also takes your basis (cost) and holding period as his own. When he sells the stock, he will report the gain on his income tax return. If the recipient is in a low enough tax bracket, there may be no tax on the gain.
Take this example. Let’s assume you purchased $2,000 worth of XYZ stock four years ago, and the stock is now worth $10,000. If you gift that stock to a qualified charity, you will get a deduction for $10,000, completely avoiding tax on the $8,000 of built-in profit. If you gift the stock to someone who sells it, that individual will report a gain of $8,000 on his or her income tax return. The tax, if any, is determined by the recipient’s income tax bracket.
Which stocks you give away, which stocks you sell, and those which you hold for another time should be determined by your long-range financial plans. Contact us for assistance in determining the best tax advantage of selling or gifting stocks.
Written by: Doug Rodrigues