The Best Gift to Give to Lower Your Tax Bill
Dear Rich Lifer,
What gift is more thoughtful than a card filled with cash, takes just a few minutes to buy, and has the potential to keep giving long after it’s been opened?
And if you’ve ever wondered how you can gift stock to friends, family, or your favorite charity, today we’ll show you some interesting ways you can do it with some added tax benefits you may not have realized exist.
But before we get into how to actually gift stock, why consider gifting stock in the first place?
Besides convenience, there are several legitimate reasons to gift someone you love shares in a company.
If anything, gifting stock can simply be your way of helping your kids or grandkids avoid making the same mistake you and most other investors made — which is starting to invest earlier.
From a tax perspective, gifting stock is also a great way to pay zero capital gains taxes.
For example, imagine you have stock with a lot of gains built into it. If you sell today, you owe taxes on those gains. Even if it’s long-term, you could be looking at paying at least 15%.
Instead, you could gift the stock by transferring it to your nephew as a graduation present. Your nephew receives the appreciated stock and can decide whether to sell or hold on to it.
Assuming your nephew is in a lower tax bracket, he might not have to pay any capital gains taxes.
So, both you and your nephew, assuming his income is less than $40,400 in 2021 as a single filer, avoid paying capital gains taxes altogether on a stock that has been appreciating for years.
Not a bad deal. But it’s not the only way you can gift stock. You can also buy stocks or other securities for the sole purpose of gifting them.
Here are four more ways you can begin gifting stocks:
Open a Custodial Account
This has to be one of the easiest ways to get your kids started in stocks.
Opening a custodial account is simple, all you need is basic information about your child: name, birthday, and social security number. Once it’s set up, you manage all the action in the account or teach your kid how to invest.
You can transfer existing shares of stock, mutual funds, and other securities from your account to the custodial account, or buy stock directly in the custodial account.
When your child reaches a certain age, typically 18 or 21, they will take full control of the account.
Donate to Your Favorite Charity
Another way you can gift stock is by donating it to your favorite charity. Donating shares to a charity that accepts stock is a win-win for the charity and for you.
Let’s say you want to donate $1,500 to a charity you support. You could simply dip into your investment portfolio and sell $1,500 worth of stock.
But, you might have to pay capital gains taxes on that sale, so you’d be donating less than the original $1,500 you’d hoped to give.
A better approach is gifting the charity $1,500 worth of stock.
Because you’re not realizing any of the gains, you won’t pay any taxes. Plus, the charity won’t pay capital gains taxes either since it’s a tax-exempt entity.
Additionally, you might even be able to claim a fair market value charitable deduction on that donation. If you’re feeling especially generous, you could even pass those savings on to the charity as well.
All in all, donating stock instead of cash to charity is the better choice.
Gifting Through a DSPP
If you want to bypass your brokerage, you can often buy stock directly from the company in which you’re investing, through a direct stock purchase plan (DSPP).
Most large companies allow investors to purchase stocks without charging any fees and sometimes will even give you a discount through the issuing company.
The process is pretty straightforward, you fill out a form with the recipient’s contact information and mail in your check.
For example, Home Depot has a direct stock purchase plan that makes it easy to gift shares. They use a transfer agent to make it all happen.
Other companies that offer DSPP include Coca-Cola, Starbucks, Walmart, and Pfizer. The easiest way to know if a company has a DSPP is to Google [company name] + DSPP.
Another option, if the company you’d like to gift stock does not have a DSPP, is to go through a company that specializes in gifting stocks.
Gift Your Inheritance
The last way we recommend gifting stock is if you’re planning to pass down your wealth to your kids or other family members.
Gifting stock can be a powerful tool versus liquidating and having to pay capital gains taxes. The IRS allows you to gift up to $15,000 per year, per person, which includes stock.
Plus, the $15,000 limit is not bound by marital or family ties, so technically you could gift $15,000 worth of stock to all your children, grandchildren, in-laws, friends, and caregivers each year.
If this interests you, it’s best to start planning ahead so you can draw down your portfolio over time.
As you can see, there are a number of ways you can gift stock and avoid paying hefty capital gains taxes. Think outside conventional gifts this year and give someone you care about the gift of stock gains.
To a richer life,
The Rich Life Roadmap Team