A series of strategies for tax-wise investors. Table of Contents.
Asset handover
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You can move appreciated assets from this person to that person, in order to reduce or eliminate the tax on the capital gain. You could, for example, transfer a winning stock position to your daughter to help her pay off college loans or buy a house. She picks up your cost basis. If she’s filing a joint return in 2021 and her taxable income (including the gain you’re handing off) is less than $80,800, her capital gain tax rate is zero.
As always with taxes, tricky rules surround a goodie like this. The stock has to be held for more than a year to get the benefit of the favorable rates on capital gains. Another hazard is the kiddie tax, which throws investment income back onto a parent’s tax return. There are various conditions under which the kiddie tax does not apply; one safe harbor is that the kid is at least 24 at the end of the year in which the stock is sold.
Think, also, about gift taxes. The federal gift tax has an exclusion of $15,000 a year. This freebie can be magnified to $60,000 if you file some paperwork and split the gift between you and your spouse at one end and your kid and her spouse at the other. To complete this juggling act you would file two Form 709 estate/gift tax returns.
Second tactic: You give the appreciated Tesla shares to your 94-year-old father with the expectation they will be willed back to you. At his death, a “step-up” shelters the capital gain from taxation. Note: If the oldster dies within a year you lose the step-up.
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One caution is that Congress is contemplating a repeal of the step-up rule. The law change might hit just very wealthy people or it might hit everyone.
For more information: IRS Publication 550, Publication 544, and Instructions for Form 709.