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Cents and Sensibility Guy Steele |
Giving stocks as a gift
can ease tax burdenDon't look now, but the holidays are upon us. If you're having trouble thinking of the perfect gift, consider something you can't find at the crowded mall: stocks.
Stocks can be excellent gifts for children and adults. When you give shares of stock to kids, you're helping to teach them the importance of long-term investing and the way our financial system works. And when you give stocks to adults, you'll help them make progress toward their important financial goals.
Giving stocks isn't much more difficult than giving cash, but you do need to do a little number crunching. For starters, you'll need to know what you originally paid for the stock (its "tax basis"), how long you've held the stock and the fair market value of the stock at the date of the gift. Recipients will need this information to determine gains or losses if and when they decide to sell the stock you've given them.
Self-interest
When you give stocks, you're doing so out of thoughtfulness -- but you may also be helping yourself. If you're giving away stocks that have appreciated in value, you won't be liable for the capital gains taxes, which can be considerable, even though the maximum long-term capital gains rate has now been cut to 15 percent (for asset sales after May 6, 2003, effective through 2009). And while you're thinking of taxes related to your gifts of stock, keep in mind that you can give up to $11,000 per year to as many people as you want without incurring gift tax implications.You also can get tax advantages when you give gifts of appreciated stock to a charity in honor of a loved one. You'll get an immediate tax deduction for the fair market value of your gift, and you won't have to pay capital gains on the stocks.
Retirement gift
If you have loved ones that are saving for retirement, consider giving them money to add more shares of stock (or bonds or other investments) to their IRAs. For 2003 and 2004, investors may be able to put up to $3,000 in a Roth or Traditional IRA (or $3,500 if they are 50 or older). If your intended recipients have fully funded their IRAs for 2003, they can earmark your gift for their 2004 IRAs.
Taxes on children
At first, when you tell your children you're giving them a gift of stock, they may give you a funny look. But it really won't take much to get them interested. Try to find stocks issued by high-quality companies with which your children are familiar. Your kids may be excited to be part owners of companies that produce the clothes they wear, the food they like and the movies they watch.When you do give stocks to your kids, you'll have to be aware of the "kiddie tax." Actually, the kiddie tax is not really a specific tax at all -- the term refers to the limitations that the IRS puts on the ability of children under 14 to have unearned income taxed at their lower tax rate. According to the kiddie tax rules for 2003, the first $750 in unearned income -- interest, dividends and capital gains -- is tax free, and the next $750 is taxed at the child's tax rate, which is typically 10 percent. If your child has unearned income of more that $1,500, he or she will be taxed at the rate that would apply to you if this money were added to your taxable income.
Gifts that last
The holiday season comes and goes in a rush. But when you give gifts of stock to loved ones, your generosity will be felt long after the holidays are just a warm memory.
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Guy Steele is a financial planner and head of the Pali Palms office of Edward Jones. Send planning and investing questions to him at 970 N. Kalaheo Ave., Suite C-210, Kailua, Hawaii, 96734, or call 254-0688