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Retirement & Financial Planning

Holland Financial

This Tax Question on Stocks Gave Me a Workout!

“I’ve got a stock that has grown from $10 a share to $50 a share. I don’t need the money. Is it better to sell it, give it to my kids now, or leave it to them when I die?”

This excellent question was posed to me by “Jack” between dumbbell curls at the gym. It provides a great example of how taxes and investing can be interrelated. The “correct” answer will depend on each person’s individual situation, but here are some options for Jack to consider:

#1 – Sell it. There’d be a $40 per share capital gain. I don’t know the specifics of the stock transaction, but let’s assume Jack purchased 1,000 shares, at $10 a share, five years ago. That would mean a $40,000 long-term capital gain to report on the sale. The amount of tax due would depend on a variety of factors, including: Jack’s other income, his marital status, and whether he has any capital losses to offset the gain. For example, if Jack is married, has no losses to offset the gain, and has at least $77,201 of taxable income for 2018, he’d owe 15% tax ($6,000) on the $40,000 of capital gain.

#2 – Gift it. Now, if you give an appreciated asset to someone else during your lifetime, the recipient will use your basis (what you paid for it) when it comes time to figure what they owe in income taxes (like in option #1). So, if Jack gives the stock to his son, who later sells it for $100 a share, the son will have a $90 capital gain per share. He’d still use the initial purchase price of $10 per share when he figures his gain and how much tax he owes.

#3 – Leave it. An interesting “wrinkle” in the U.S. tax code is that, if you die owning an asset (like stock, per this example), the basis gets “stepped-up” to the value of the stock on the date of your death, not what you paid for it. So, if Jack kept the stock, died, left it to his son, and then the son sold it, the son would only pay tax on the gain above what the stock was worth on the day Jack died. In effect, both Jack and his son escape the capital gains tax.

Please note that federal income taxes and federal gift and estate taxes are two separate taxes. Some people pay one or the other or both. However, most people are no longer affected by gift and estate taxes since the exemption for 2018 is now $11,200,000 per person. That means you can either give $11,200,000 to someone during your lifetime, or leave him/her that amount at your death, and there’d be no gift or estate taxes (also known as “death” and “inheritance” taxes).

Good to know, right? Got a financial question you’d like answered here? Just drop me a note . . . or, you can always try to catch me at the gym!


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