Gifting Appreciated Stock to Pay For College?

[ProspectiveBum]

I have a brokerage account, which I'd been planning to slowly liquidate to fund our kids' future college expenses. Looking into it further, it seems that I could potentially gift the kids appreciated stock to fund their schooling, which would significantly lower the tax bite. My oldest has a part-time job, but will be in the 0% capital gains bracket. I think California will still take their pound of flesh, treating the gift as regular income, but she'll be in a much lower tax bracket there, too. All told, the tax benefit would be pretty substantial.

Downsides, as I see them:

These gifts will count as income to the kids, which could hurt future financial aid. I'm honestly not expecting much financial aid based on our income and assets. Any scholarships that may be coming will probably have to be merit-based.

It's a gift, and could be used for any purpose the kids like. My oldest I have no concerns about "blowing that dough". My younger is a bit of a spendthrift, so we'll see. He's also younger, and not in high school yet, so things may change by the time he's college age.

The so-called "Kiddie Tax" went away with the 2018 Tax Cuts and Jobs legislation. I think all the provisions in the Act will expire in 2025 barring an extension, so it's possible that we'll only have a few years to do this.

Beyond that, I can't really think of any other downsides. Am I missing anything?

 

[RE2Boys]

The "kidde tax" still exists, but the method of calculating the tax was significantly changed along with the tax rates. See: https://www.thetaxadviser.com/issue...ded-partnerships-tax-treatment-investors.html

the Kiddie tax now uses the trust income tax rates for unearned income. Your child would be in the 15% capital gain bracket for unearned income over $2651.

 

[ProspectiveBum]

The "kidde tax" still exists, but the method of calculating the tax was significantly changed along with the tax rates. See: https://www.thetaxadviser.com/issue...ded-partnerships-tax-treatment-investors.html

the Kiddie tax now uses the trust income tax rates for unearned income. Your child would be in the 15% capital gain bracket for unearned income over $2651.

Doh! Thanks, RE2Boys. Perhaps I misunderstood entirely, but it looks like the kiddie tax was briefly done away with as part of the original 2018 legislation, before being restored for 2020: https://www.journalofaccountancy.com/issues/2020/jul/kiddie-tax-rules-restored.html

Thanks for clarifying that. Seems like there's no major benefit to gifting it vs liquidating it myself. We might save a bit on state taxes, but might not be enough $$$ to be worth the hassle.

 

[cathy63]

You can give appreciated stock to your kids and have them sell it, but it works much better if you're not claiming them as dependents. When your kids sell stock, they will have to file their own tax returns because they'll have cap gains. If they can be claimed as a dependent on your return, then their standard deduction is only $1100 and everything above that amount is taxed at your rate.

Another option to investigate is making them independent when they are in college. If you start now, giving each child $15K of stock every year ($30K if you are married), then they can just hold onto it until they start college. At that point, they need to sell enough stock every year to provide more than half their own support so they can't be claimed on your return. The independent kids will be eligible for all the education related deductions and credits on their own tax returns. This might be a good idea if they can take higher education credits than you can, which depends on your own income levels during those years. To figure out if there's any benefit, you'd have to do some test returns using numbers that are realistic for your own family situation.