Federal Tax Question

[Reefgazer]

Do any of you accounting types know the answer to this question:  If my elderly mother wanted to gift me with stock (so she wouldn't cash in the stock and hand me cash, but would transfer the stock to me as a gift), I think there is some amount that she can transfer to me tax-free for her.  Is that correct?  Do I incur a tax penalty if I keep it as stock and do not cash it out?

[lewber]

You can transfer up to $14,000 every year to as many different people as you want tax free. It wouldn't matter if it is in cash or stock. It would be the value of the stock on the date of the transfer. There is no tax paid by you - the recipient- either way.

If the value is more than $14,000 then she is supppsed to file a gift tax return. There would still be no tax but the amount over $14,000 would go against her lifetime exclusion which is currently just over $5 million.

If it's over $14,000 she could also choose to give you some shares totaling 14,000 and then give some shares to your husband or children so that the value for each is still 14,000 or less.

If you google gift tax allowance 2017 you'll find some other explanations that might help.

[lewber]

Gifting vs inheriting stock is worth looking at though for tax purposes-

 

https://www.google.com/amp/amp.kiplinger.com/article

[StephanieZ]

I'm not a CPA, but I've received stock gifts from my parents over the years. 

 

My understanding is that the gift is totally tax-and-reporting free if it's under 14k (per year, per person, so one person could give 14k to each you and your spouse and each of your kids if desired ..  .) Over 14k per person, your mom would have to report it at tax time, but unless it's over the current estate tax exemption maximum, no taxes on the gift would be required. This then gets deducted against her lifetime estate tax maximum, which is $5,490,000 dollars currently (subject to change, of course). That means she pays zero tax at the time of gift unless it is over that amount, but when she eventually dies the amount that is tax-free inheritance is reduced by the excess gift amount. So, if she gives you 100k in stock, then when she dies "only" the first 5,390,000 is tax free inheritance. (Note that some states tax inheritances also.)

 

Many families avoid the need to report the estate tax deduction by spreading out the gifts among multiple family members over multiple years. But, if there is little risk of her estate being over 5,500,000, then there's no real need to do that. The actual reporting of the larger gift is a very simple part of your mother's tax return at year end. No biggie. Easy peasey. (The gift receiver does NOT have to report it or pay taxes on it.)

 

When you receive the gifted stock, you get your mom's "basis", so, say it's worth 100k now, but she only paid 35k for it, your "basis" is now 35k, so WHEN YOU SELL IT, you'd pay federal capital gains taxes on the gain (65k). You capital gains rate varies from 0 to 20% to possibly 24% if you're very high income (in which case, I'd bet you have a CPA to answer these questions more accurately). Some states also tax capital gains. 

 

Note that if you INHERIT (vs being gifted) the stocks, you get a "stepped up basis", so if you sold that 100k of stock after inheriting it (instead of receiving it as a gift during life), your "basis" would be 100k (value at time of death), so you'd pay no capital gains taxes if it was sold before it appreciated more. 

 

Hope this is helpful. 

 

So, just be sure you get information on the current "basis" of the stocks when they are gifted. Her broker should be able to give you that info. Hold onto it, because whenever you sell it, you'll need that data to pay appropriate taxes (or you'd have to assume a $0 basis which could be very expensive.)

 

If you are relatively low income, be sure to check the various tax brackets for capital gains before making sales, as you might benefit from selling the stock in chunks over a number of years, so you can pay the lower capital gains rates. 

 

Also, be sure your mom isn't likely to be claiming Medicaid in the next 5 years (or so -- check with an estate attorney) before accepting the gift. Otherwise, if she claims Medicaid in the next few years, they can (and will) do a "look back" and come after you for the money/gift! If this *might* be the case but isn't certain/likely, then, personally, I'd advise accepting the gift, but putting the gifted money in a separate account that you don't touch until after the Medicaid look back period (again, talk to an estate attorney), as if you go and spend that 100k, you might be in a world of hurt if the government comes back after you for reimbursement . . . I'd absolutely get a tax/estate attorney involved in this before proceeding if there's any chance of needing Medicaid in coming few years. 

Edited June 7, 2017 by StephanieZ

[Reefgazer]

Thanks; this is exactly what I was looking for.  Can I "inherit" the stock even though my mom is still alive, or can you only inherit once she dies?

I'm not a CPA, but I've received stock gifts from my parents over the years. 

 

My understanding is that the gift is totally tax-and-reporting free if it's under 14k (per year, per person, so one person could give 14k to each you and your spouse and each of your kids if desired ..  .) Over 14k per person, your mom would have to report it at tax time, but unless it's over the current estate tax exemption maximum, no taxes on the gift would be required. This then gets deducted against her lifetime estate tax maximum, which is $5,490,000 dollars currently (subject to change, of course). That means she pays zero tax at the time of gift unless it is over that amount, but when she eventually dies the amount that is tax-free inheritance is reduced by the excess gift amount. So, if she gives you 100k in stock, then when she dies "only" the first 5,390,000 is tax free inheritance. (Note that some states tax inheritances also.)

 

Many families avoid the need to report the estate tax deduction by spreading out the gifts among multiple family members over multiple years. But, if there is little risk of her estate being over 5,500,000, then there's no real need to do that. The actual reporting of the larger gift is a very simple part of your mother's tax return at year end. No biggie. Easy peasey. (The gift receiver does NOT have to report it or pay taxes on it.)

 

When you receive the gifted stock, you get your mom's "basis", so, say it's worth 100k now, but she only paid 35k for it, your "basis" is now 35k, so WHEN YOU SELL IT, you'd pay federal capital gains taxes on the gain (65k). You capital gains rate varies from 0 to 20% to possibly 24% if you're very high income (in which case, I'd bet you have a CPA to answer these questions more accurately). Some states also tax capital gains. 

 

Note that if you INHERIT (vs being gifted) the stocks, you get a "stepped up basis", so if you sold that 100k of stock after inheriting it (instead of receiving it as a gift during life), your "basis" would be 100k (value at time of death), so you'd pay no capital gains taxes if it was sold before it appreciated more. 

 

Hope this is helpful. 

 

So, just be sure you get information on the current "basis" of the stocks when they are gifted. Her broker should be able to give you that info. Hold onto it, because whenever you sell it, you'll need that data to pay appropriate taxes (or you'd have to assume a $0 basis which could be very expensive.)

 

If you are relatively low income, be sure to check the various tax brackets for capital gains before making sales, as you might benefit from selling the stock in chunks over a number of years, so you can pay the lower capital gains rates. 

 

Also, be sure your mom isn't likely to be claiming Medicaid in the next 5 years (or so -- check with an estate attorney) before accepting the gift. Otherwise, if she claims Medicaid in the next few years, they can (and will) do a "look back" and come after you for the money/gift! If this *might* be the case but isn't certain/likely, then, personally, I'd advise accepting the gift, but putting the gifted money in a separate account that you don't touch until after the Medicaid look back period (again, talk to an estate attorney), as if you go and spend that 100k, you might be in a world of hurt if the government comes back after you for reimbursement . . . I'd absolutely get a tax/estate attorney involved in this before proceeding if there's any chance of needing Medicaid in coming few years. 

 

[StephanieZ]

Thanks; this is exactly what I was looking for.  Can I "inherit" the stock even though my mom is still alive, or can you only inherit once she dies?

You can only inherit it (tax-free with a stepped up basis) after she's passed away.

 

If you take it before then, you take HER basis as YOUR basis and have to pay taxes on gains if/when you sell it. If you just hold on to it and don't sell it, you won't pay any taxes on it. 

 

One little trick I used many years ago when I had some very-low-basis stock I'd been gifted was to transfer parts of it to each of my kids and then sell a tiny bit (IIRC, $600/yr back then. I think it's up to 1000/yr today) in each of their names, as up to that amount cap gains was 0 rate for the kids. Then I put those little bits into their Educational IRAs (AKA Coverdell Accounts). Wasn't a huge amount of money, but it added up over time, and once it was moved into the EDIRAs, it grew tax free, and now it's sitting there waiting for us to spend when we need it for college expenses (and can be transferred among your kids or even to grandkids if you don't need to use it for the kid it was initially set up for). 

 

Google up (or ask your CPA) the cap gains rates for you and your kids, and see if that approach makes sense. I did that in the 90s, so taxes have changed a lot since then. Back then, our taxes were simple enough that I figured it all out myself with TurboTax, but now our tax situation is way too complicated to DIY, so I now rely on a CPA to answer these sorts of questions. 

 

Also, consider your mom's cap gains rate. If she has a lower cap gains rate than you do, then it might make more sense for her to sell the stock and pay the taxes and then give you what's left over after taxes. 

 

Looks to me that if your total income is under 75k (married filing jointly), your cap gains rate is 0. So, if your taxable income would be 50k w/o the stock sale, you could sell 25k of GAIN tax free, and then whatever you sell beyond that would be taxed at 15% or even 20% if your income is very high. 

 

http://www.bankrate.com/finance/taxes/capital-gains-tax-rates-1.aspx

 

 

So, anyway, look at the options for selling BEFORE the gift is made (mom's name), after the gift to you (your name and/or your spouse's), or even after gifting some to your kids (in each of their names) . . . You can transfer however much you want to each kid (set up Uniform Gift to Minor Accounts with your brokerage -- I recommend Vanguard), and then sell 1000 worth of GAIN each year, then reinvest it into either long term investments (education accounts or whatever) or simply spend it on the kid's behalf for camps, extracurriculars, etc. Totally kosher, and now you've "captured" that 1000 worth of gain, so the basis is higher . . . which is good when it eventually gets cashed out -- especially if you leave the money in taxable accounts like a UGTM account. 

 

(This is all assuming these are LONG TERM gains, FYI.)

[StephanieZ]

ps. I've been assuming your mom holds these funds in a taxable account, i.e., a normal brokerage account and NOT an IRA or 401K or similar tax-deferred type of account. If she's holding the stock in any of those tax-preferred accounts then she will have to pay regular income tax when she withdraws anything from the IRA or 401k. (And she will NOT pay capital gains on those sales, but income tax is usually higher than cap gains.)

[Reefgazer]

Yes, they are in regular brokerage accounts.  Thanks!

ps. I've been assuming your mom holds these funds in a taxable account, i.e., a normal brokerage account and NOT an IRA or 401K or similar tax-deferred type of account. If she's holding the stock in any of those tax-preferred accounts then she will have to pay regular income tax when she withdraws anything from the IRA or 401k. (And she will NOT pay capital gains on those sales, but income tax is usually higher than cap gains.)