What is the tax impact of gifting someone stock?

Ralph Estep Jr.:
00:00

Have you ever considered gifting stocks to a loved one? It's a generous gesture, but what about the tax implications? Stay tuned to find out how you can give without getting hit by a hefty tax bill. Imagine being able to share your financial blessings with others while still being a good steward of your own resources. Today, we'll explore just how to do that.

Ralph Estep Jr.:
00:26

Before we dive into today's topic, let's take a quick look back at yesterday's show. We discussed how to rebuild your credit after a financial crisis, offering hope and practical steps for those facing challenging times. As always, find all of our past episodes at askralph.com. Well now, let's turn our attention to today's focus and that's the tax impact of gifting stock and ways to reduce that impact. But first let's hear from one of our listeners.

Ralph Estep Jr.:
00:56

We have a great message from Robert in Albany, New York. And Robert writes this, "Dear Ralph, I've been blessed with some successful investments in the stock market, and I'd like to share some of that blessing with my nephew who's about to start college. I was thinking about gifting him some stocks to help him with his education expenses. But I'm really worried about the tax implications for both of us. What should I consider before making this gift, Ralph? Thank you for your show. It's been a beacon of financial wisdom in my life."

Ralph Estep Jr.:
01:25

Well, thank you, Robert, for your question and for your kind words. Your desire to bless your nephew is commendable, and I'm excited to help you navigate this situation. Well, welcome faithful listeners to another episode of The Ask Ralph Show, mastering your finances from a Christian perspective. I'm your host, Ralph, and I'm thrilled to have you join me today on this Tax Talk Thursday.

Ralph Estep Jr.:
01:46

Before we address Robert's question, let's turn to the word of God for guidance. In 2 Corinthians 9:7, we read this. "Each of you should give what you've decided in your heart to give, not reluctantly or under compulsion, for God loves a cheerful giver." Now that verse was really about charity, but I thought it fit today and this verse reminds us that giving is a joyful act, one that should come from the heart. But as good stewards of our resources, we also need to be wise in how we give. So let's break down the tax implications of gifting stocks and explore some ways to minimize the tax impact.

Ralph Estep Jr.:
02:29

First, let's consider the basics of gifting stocks. When you gift stocks, you're essentially transferring ownership of those shares to someone else. It's really that simple. This act of generosity can have tax implications for both the giver and the recipient. So let's start first with the impact for the giver. Here's some key points to consider. First, we have to consider the annual gift tax exclusion. So as of 2024, you can gift up to $17,000 per person per year without triggering any gift tax.

Ralph Estep Jr.:
03:00

Now this amount is adjusted periodically for inflation, so you always got to check the current limit. They tend to go up each year. If the amount is greater than the annual exclusion, we can consider using what's called the lifetime gift tax exemption. So even if you exceed the annual limit, you may not own gift tax immediately. Instead, the excess amount will count against your lifetime gift tax exemption, which is quite substantial. Like right now it's over $12 million.

Ralph Estep Jr.:
03:26

There are also capital gains considerations. When you gift stocks, your cost basis, which is a fancy way of saying what you paid for the stocks, and the holding period that you've held them transfer to the recipient. This means if the stocks have appreciated significantly in value, you know, they've gone up in value, the recipient might very well face a large capital gains tax when they sell it. We're going to talk about some of the specifics of that later on in the episode.

Ralph Estep Jr.:
03:51

So now for the recipient. First off, there is no immediate tax consequence. This is good news. The recipient doesn't owe income tax on the gift when they receive it. But we also have to consider the future capital gains. When the recipient sells the stocks, they'll owe capital gains tax on the difference between the sales price and the original cost of basis. We talked about that a few minutes ago. So Robert, if the goal is to use the stocks for funding education, then I assume that will be sold, so this will need to be considered as part of this plan.

Ralph Estep Jr.:
04:23

Well, let's talk about education expenses. If the stocks are sold to pay for qualified education expenses, there might be additional tax considerations or some benefits to explore. We'll talk about some of those examples in a few moments. So Robert, while your generosity is admirable, it's essential to consider these factors to ensure your gift has the maximum positive impact on your nephew's future.

Ralph Estep Jr.:
04:46

Well now let's explore some strategies to reduce the tax impact of giving stocks. The first one is this, and that is gift appreciated stocks wisely. If you have stocks that have appreciated significantly, gifting them can be a tax efficient strategy. The recipient gets the full market value, and you'll avoid paying capital gains tax on the appreciation. So if you think about that, it saves you taxes, but the person you're giving them to is going to have to pay that tax.

Ralph Estep Jr.:
05:14

Let's look at number 2. And that's consider gifting to a 529 Plan. If your primary goal is to help with education expenses, you might consider gifting a stock to a 529 college savings plan. This can offer tax advantages for education related expenses. Number 3. Spread the gift over multiple years. If the value of the stocks you want to gift exceeds that annual gift tax exclusion, consider spreading the gift over several years to stay within that annual limit where you can use that limit each year to your benefit.

Ralph Estep Jr.:
05:46

Number 4. Explore charitable giving options. If you're also interested in supporting charitable causes, you might consider a donor advised fund. This can provide immediate tax benefits while allowing you to support both your nephew and charitable causes over time. And number 5, this one is the key. Consult with a tax professional. As I've said on the show, every situation is unique. So it's always wise to consult with a tax professional or financial advisor who can provide personalized advice based on your specific circumstances.

Ralph Estep Jr.:
06:19

And listen, if you're interested in discussing this further, you can always schedule a consultation with me right from our website. Just go to askralphpodcast.com/store. So let's look at a hypothetical example to illustrate these points. Suppose Robert decides to gift his nephew $20,000 worth of stock that he originally purchased for $10,000 five years ago. Here's how it might play out.

Ralph Estep Jr.:
06:42

Let's look at scenario number 1, and that's a direct stock gift. Robert gifts the stock directly to his nephew. He'll need to report the $3,000 excess over the annual gift tax exclusion, which will count against his lifetime exemption. So we had that $20,000 gift. But he's got that $17,000 exclusion. When the nephew sells the stock to pay for college, he's going to owe capital gains tax on $10,000 in appreciation. That's really simple. That's the $20,000 current value minus the 10 that it was paid for. Now the full value of the stock will be considered a student asset on his FAFSA forms. So this may affect his financial aid. It's something to consider.

Ralph Estep Jr.:
07:24

Let's look at scenario number 2, and that's a 529 Plan Contribution. In this scenario, Robert sells the stock. Now Robert is going to pay the capital gains tax on that $10,000 appreciation and contributes the proceeds to a 529 plan for his nephew. Now here's the best part. The money grows tax free in a 529 plan. And this is also a good thing. Withdrawals for qualified education expenses are tax free and 529 plan assets owned by a non-parent relative have minimal impact on financial aid calculations. So it's not going to impact that FAFSA thing.

Ralph Estep Jr.:
08:00

Let's look at scenario number 3 and that's direct tuition payment. Let's say that Robert sells the stock, pays the capital gains tax and uses the proceeds to pay the tuition directly to his nephew's college. That direct tuition payment is exempt from gift tax, regardless of the amount. And it also doesn't count as income for his nephew or impact his FAFSA. So there's really a lot of scenarios you're in. Each of these scenarios has its pros and cons, and the best choice really depends on factors like Robert's tax situation, his nephew's situation and other financial resources and the specific college cost involved.

Ralph Estep Jr.:
08:36

Remember, the goal here is to be a cheerful giver while also being wise and using your resources. So by carefully considering the tax implications and exploring various gifting strategies, you can maximize the impact of your generosity. Well now let's recap what we've covered today. Gifting stocks can have tax implications for both the giver and the recipient. I think we kind of laid that out. The annual gift tax exclusion allows you to gift up to $17,000 per person per year without triggering any gift tax.

Ralph Estep Jr.:
09:07

When you give stocks, your cost basis and the holding period are transferred to the recipient. Just like we talked about in Robert's situation. He had held the stock for five years. He paid $10,000 for it. So when he transferred it to his nephew, that was his nephew's basis, $10,000 and a five-year holding period. Recipients don't owe income tax on the gift, like when they gave it, but may owe capital gains tax when they sell the stocks. Strategies to reduce tax impact include gifting appreciated stocks wisely. Maybe spreading them out over several years. Considering 529 plans. As we said, spreading gifts over multiple years and exploring charitable gifting options.

Ralph Estep Jr.:
09:45

So here are some action steps for our listeners. The first one's this. Review your investment portfolio and identify any appreciated stocks that might be good candidates for gifting. The second thing is to discuss your gifting plans with the intended recipient to ensure they're prepared for any potential tax implications. The worst thing you want is the nephew to assume he's going to get that whole $20,000 and not have any tax benefit issues with it.

Ralph Estep Jr.:
10:10

The third thing is this. Consult with a tax professional or a financial person to create a gifting strategy that aligns with your financial goals and values. This is really critical. It's important that you're always well-informed. The fourth thing is if you're considering gifting for education purposes, research those 529 plans and their potential benefits. Fifth thing. Keep accurate records of your gifts, including the stock's original purchase date and the price for future tax purposes. As we talked about, you got to make sure you do this right.

Ralph Estep Jr.:
10:42

Well, I hope this information helps you, Robert, and all of our listeners who may be considering gifting stocks. Remember this. Generosity is a beautiful expression of our faith but it's also important to be wise in how we do it. And before we wrap up, I want to remind you all to tune in tomorrow for our next episode. I'm going to be tackling this question. What is meant by the social security earnings cap and how does that affect my future benefits? It's a topic that's going to affect many of us, so you don't want to miss it.

Ralph Estep Jr.:
11:08

Well, now it's time to call for our action of the day. If you found value in today's episode, I encourage you to visit our website. That's at askralph.com and join our community. When you sign up for our email list, you'll receive a free copy of my book, Mastering Your Finances. This book normally sells for $10 on Amazon, but it's my gift to you for being part of our community. And don't forget, this show is all about answering your questions. So please send in your financial queries. Whether it's about budgeting, investing, retirement planning or any other financial topic. We're here to help you navigate your financial journey from a Christian perspective.

Ralph Estep Jr.:
11:46

Last but not least, if you know somebody who could benefit from this information, do me a huge favor and share this episode with them. Your recommendation could be the key to helping someone else achieve financial freedom while growing in their faith. Well, thank you for tuning in to The Ask Ralph Show. Until next time, stay financially savvy my friends, and may God bless you abundantly.