Gift Stock to an Individual in a Lower Tax Bracket

Recipients of gifted stock receive the giver's holding period and cost basis. If the recipient's long-term-capital-gains tax bracket is lower, it will yield tax savings.

Strategy Overview

When you gift appreciated stock, the recipient gets the giver's holding period and tax/cost basis. This presents a strategic opportunity to save on taxes if the recipient is in a lower long-term-capital-gains tax bracket --> as the net-of-tax proceeds the recipient will have upon sale will be larger than if the giver sold the stock and gifted their net-of-tax cash.

Tax Details

Recipients of gifted stock inherit the giver's holding period and cost basis. When the recipient sells the shares, capital gains tax is due on the difference between the sale proceeds and the inherited cost basis. In 2023, there are three different federal long-term-capital-gains tax brackets: 0%; 15%; and 20%, as well as potentially NIIT.

If the gift giver has a higher long-term capital gains tax bracket than the recipient (especially if its 20% vs 0%), gifting appreciated stock instead of selling and gifting the cash net-of-tax will yield a higher amount of after-tax dollars.

Key Benefits

• Reduce total capital gains tax paid. When you gift appreciated stock, you avoid paying capital gains tax on the increased value. If the recipient is in a lower tax bracket than you, they can sell the stock and potentially pay a lower capital gains tax rate (or possibly no tax at all).

• Increased after-tax value received by recipient. When a gift recipient has a lower long-term-capital-gains tax bracket, they will have more cash after-taxes if appreciated shares are gifted to them and then sold, as compared to the gift giver selling the stock and then gifting the recipient the after-tax proceeds.

Key Considerations/Flags

• Gift amounts are limited. The IRS imposes annual limits on the amount you can gift to any individual without incurring gift tax.

• Potential single stock concentration risk. If you gift stock of a single company, the recipient will take on the risk of holding a concentrated position in a single stock (if they do not immediately sell the holding).

• State taxation needs to be considered as well. In additional to federal LTCG tax rates, the tax benefit also needs to consider the impact of state taxes. This can materially change the tax benefit (both positively and negatively).

Strategy: When to Consider This and When to Avoid It

🟢 When to Consider This Strategy:

• You desire to gift to an individual. This strategy requires making a gift. Once its completed, the recipient will own the shares and can do what they desire with them (and the associated cash if they sell).

• Recipient has a lower long-term capital gains tax rate. The most beneficial scenario for gifting stock is when the recipient is in the lowest LTCG tax bracket and qualifies for a 0% rate. However, gifting to an individual in the 15% LTCG tax bracket and no NIIT still saves 8.8%.

🔴 When to Not Use This Strategy:

• Recipient has the same, or higher, long-term capital gains tax rate. No tax benefit exists if the recipient has the same LTCG tax rate. And it would actually be tax detrimental if the recipient's LTCG tax rate was higher.

Example