Child Gifts and Capital Gains

[TightLines]

My first Post here I've done a lot of reading and hope to retire soon and trying to work out all the details. Eventually I'll post my numbers and current situation and ask for advice from all the smart people on here but in the meantime I had a question that I can't seem to find a clear answer on.

I'm 55 and married with 2 kids. My kids are 18 and 20 and only bring in about $4000 each a year with part time jobs. I understand between my wife and I, we can gift $30k to each child. If we gift stock, do my kids have to pay any 'gift' tax on what we give them? How do we report a 'gift' on our taxes? They will each file a tax return and will most likely get a minimal refund based on their small earned income. If they sell the stock, using our cost basis, they are under the $39K tax bracket for capital gains....so they pay no capital gains and basically has no effect on their tax return.

Do I understand this correctly?

Thanks for information.

 

[RunningBum]

Beware the kiddie tax:

https://www.irs.gov/taxtopics/tc553

It takes effect if:

1. Your unearned income was more than $2,100.
2. You meet one of the following age requirements:
   • a. You were under age 18 at the end of the tax year,
   • b. You were age 18 at the end of the tax year and you didn't have earned income that was more than half of your support, or
   • c. You were a full-time student at least age 19 and under age 24 at the end of the tax year and you didn't have earned income that was more than half of your support.
   (see the link for other qualifications, but these are the ones to worry about).
   

Basically, it's to keep you from hiding investment gains using your dependent children's lower tax status.



If these don't apply, it is a good strategy. I use it for my son, who is a little older than your kids. I gift him appreciated mutual fund shares, and he sells them. He has to use my basis, but since his income is low, he does not pay capital gains.

As long as you stay at or below the $15K per child per parent limit, you don't have to report it at all.

If it was above that amount, you still wouldn't owe a gift tax, but you would have to report it and it would count against your lifetime estate exemption.

 

[TightLines]

Thanks RB. I did read a little about the kiddie tax but I'm still a little confused.

1. They both will have unearned income more than $2100. (the $30k gift each)
2. They are both full time students (age 18 and 20). Their earned income is only $4K a year so that's well below half of my support (I'm assuming support means how much it costs me to support them).

Does this mean they'll have to pay the kiddie tax? What exactly is half of my support? If they earned more than some arbitrary number, they wouldn't have to pay the kiddie tax?

 

[RunningBum]

I think so. It's been about 20 years since I had any issues with the kiddie tax so do your own investigation. Or maybe someone with more current experience will reply.

 

[OldShooter]

... my wife and I, we can gift $30k to each child. If we gift stock, do my kids have to pay any 'gift' tax on what we give them? How do we report a 'gift' on our taxes? ...

You can give them as much as you want and there are no taxes. Over a certain amount ($15K IIRC) you have to file a report of the gift. These are used after death/added back into your estate before Federal estate tax is calculated. But that tax starts at over $10m estate value, so it probably won't affect you. To get all the details and the numbers go to the IRS web site. Don't rely on SGOTI.

You'll have to check with your state for their rules if they have an estate tax.

 

[RockyMtn]

I do believe they will get caught in the kiddie tax trap and have to pay cap gains at your rate. Had this problem a few years back with my son.

Now that he is on his own yet still qualifies for 0% cap gains tax rate I "gift" $15k of appreciated shares to his account. Sell them immediately, roll $5.5k into his Roth and with what remains I set up a monthly transfer to his checking account that he uses for incidentals.

I know, I know....some will say I shouldn't be giving adult children money! But I do this for my girlfriend and her two kids as well. Gifting appreciated securities saves me some money in taxes ($9k) and puts a smile on my face. I also fund 529's for her five grandchildren. But the 529 plans won't accept securities.

I've got more $$$ than I will ever need and it gives me pleasure to help them while they need it with growing families and new careers than waiting till I'm gone!

 

[cathy63]

Thanks RB. I did read a little about the kiddie tax but I'm still a little confused.

1. They both will have unearned income more than $2100. (the $30k gift each)
2. They are both full time students (age 18 and 20). Their earned income is only $4K a year so that's well below half of my support (I'm assuming support means how much it costs me to support them).

Does this mean they'll have to pay the kiddie tax? What exactly is half of my support? If they earned more than some arbitrary number, they wouldn't have to pay the kiddie tax?

They will owe kiddie tax if you give them stock and they sell it, because there's no way that $4K of earned income is enough to provide half what they're spending on college and other costs of living. For purposes of kiddie tax, you can't count things like withdrawals from 529 plans, scholarships, student loans, etc, when determining whether they cover half their own expenses or not. Also, if they did earn enough to cover half their expenses, then they wouldn't be your dependents and you couldn't claim them on your return or use whatever education credits they might be entitled to.

The TCJA did change the way that kiddie tax is calculated. It's more complex now with brackets and deductions instead of just using the parents' rate, and there might be cases where it is better for the child to sell stock than the parent. If it's a choice between selling it while you hold it or giving it to them and having them sell it (i.e. it's going to be sold no matter what), then you should get some tax software and do some test returns to figure out what's best in your situation. Otherwise, you can give them stock now and let them sell it in a few years when they are legally independent but probably not yet earning much.

 

[SecondCor521]

Thanks RB. I did read a little about the kiddie tax but I'm still a little confused.

1. They both will have unearned income more than $2100. (the $30k gift each)
2. They are both full time students (age 18 and 20). Their earned income is only $4K a year so that's well below half of my support (I'm assuming support means how much it costs me to support them).

Does this mean they'll have to pay the kiddie tax? What exactly is half of my support? If they earned more than some arbitrary number, they wouldn't have to pay the kiddie tax?

The $30K in gifting wound not/does not count as unearned income. Unearned income is things like dividends, interest, and capital gains (and maybe some others). If they sold the gifted stock this year, any capital gains they got from the gifted stock would count as unearned income.

It's not an arbitrary number; it's half of their support for the tax year. You can look at the IRS rules or take a look at this VITA worksheet:

https://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf

 

[TightLines]

Thanks for the replies. I thought of 2 other possibilities, please correct me if I'm wrong.

- if we don't claim my kids as dependents, they will not be paying long term capital gains if they sell the stock (they are students and have low incomes), however we lose the child and education tax credits which about equals what it would cost us in capital gains taxes anyway (if we keep the stock and sell it ourselves).

- if we file our taxes, "married but filing separately", my wife has a low income and would not have to pay any capital gains, however we lose a lot of other tax benefits. I haven't figured out how much that would equate to. I'm also not sure if we could sell stock from a joint account if she alone could report the long term capital gains.

 

[cathy63]

Thanks for the replies. I thought of 2 other possibilities, please correct me if I'm wrong.

- if we don't claim my kids as dependents, they will not be paying long term capital gains if they sell the stock (they are students and have low incomes), however we lose the child and education tax credits which about equals what it would cost us in capital gains taxes anyway (if we keep the stock and sell it ourselves).

- if we file our taxes, "married but filing separately", my wife has a low income and would not have to pay any capital gains, however we lose a lot of other tax benefits. I haven't figured out how much that would equate to. I'm also not sure if we could sell stock from a joint account if she alone could report the long term capital gains.

Not claiming them as dependents when you could is the worst of both worlds. They will still owe the kiddie tax -and- you will lose the education credits. Reread the "who must file" criteria for form 8615. If the cap gain is $2200+ and they only earn $4K, they still have to file the form whether or not they're your dependents. The IRS is way ahead of you on this, and the only way they get out of paying this tax is to start earning enough money to pay half their annual expenses.

On your second scenario, if you file MFS and sell stock held in a joint account, then you have to be able to explain how and why you divided the gain in an unequal manner. Like ... she owned the stock before the marriage, or it was purchased with her inheritance. If you live in a community property state make sure you read IRS pub 555 thoroughly before you try this. It probably won't give you a lower total tax liability.

 

[just walk away]

I investigated the kiddie tax and gifting appreciated shares recently and while I am no expert, I came up with about $4700 (1050+1050+2600 2018 numbers) of LTCG that I could gift to each of my kids at the 0% rate. I ran some numbers through Turbo Tax which seemed to confirm this, but I will not feel completely confident until tax time if this is correct. These amounts were sufficient for what I wanted to do which was provide funds to match their Roth contributions.