Capital gains taxes can significantly impact your financial situation, especially if you have substantial unrealized gains in your taxable accounts. While it’s crucial to remember that capital gains taxes are mandatory, there are strategies to minimize their impact while achieving your financial goals. This article will delve into two primary strategies: gifting appreciated assets and utilizing the step-up in basis at death.
Gifting Appreciated Assets
Gifting appreciated assets, such as stocks or bonds, to your children or a qualified charity can be a tax-saving strategy. Here’s how it works:
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Gifting to Children: When you gift appreciated securities to your children, the date of purchase and cost basis transfer to them. When they eventually sell the asset, any realized gains will be taxed at their rate, which may be lower than yours. This strategy can be particularly beneficial if your child is in a lower tax bracket.
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Gifting to Charities: Donating appreciated securities to qualified charities offers tax benefits. You can claim the current market value of the donated asset as a deduction, and the charity receives the asset without incurring capital gains tax. This strategy is more advantageous than donating cash, as you avoid paying capital gains tax while receiving a charitable deduction.
Step-Up in Basis at Death
When you pass away, your assets generally receive a step-up in basis to their fair market value at the date of your death. This means that your beneficiaries will not be liable for capital gains tax on the appreciation that occurred during your lifetime. This strategy can be particularly beneficial if you hold low basis property, as it can significantly reduce the tax burden on your heirs.
Additional Considerations
While gifting appreciated assets and utilizing the step-up in basis at death can be effective tax-saving strategies, it’s essential to consider the following:
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Gift Tax Exemption: There is a federal gift tax exemption that allows you to gift up to a certain amount each year without incurring gift tax. In 2023, the annual exclusion amount is $17,000 per recipient.
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Lifetime Gift Tax Exemption: You also have a lifetime gift tax exemption, which is currently $12.92 million per person. Any gifts that exceed this amount may be subject to gift tax.
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Kiddie Tax: If you gift appreciated assets to a child under the age of 18, the Kiddie Tax may apply. This tax ensures that the child’s unearned income, including capital gains, is taxed at the parent’s marginal tax rate.
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Estate Tax: If your estate exceeds a certain threshold, it may be subject to estate tax. Gifting assets before your death can help reduce the value of your estate and potentially avoid estate tax.
Gifting appreciated assets and utilizing the step-up in basis at death can be valuable strategies for minimizing capital gains taxes. However, it’s crucial to consider the potential tax implications and consult with a financial advisor or tax professional to determine the best approach for your specific situation. By carefully planning and implementing these strategies, you can maximize your financial legacy and minimize the tax burden on your loved ones.
How Can I Gift Money To Kids Without Being Taxed?
FAQ
Can I reduce my taxable income by gifting money?
Is there any way to avoid capital gains tax?
Are gifts exempt from capital gains tax?
Can I gift stock to my child to avoid capital gains?
Do you pay capital gains tax on a noncash gift?
The gift tax can apply to both cash and noncash gifts. If you receive a noncash gift, you may end up paying a capital gains tax on a portion of its value even if it falls below the gift tax exclusion. For instance, let’s say someone gives you stock valued at $10,000, but they spent only $1,000 to buy it.
Who pays capital gains tax if you give a gift?
Usually, the person giving away the asset (the donor) pays the tax, but the donee may be responsible for paying the tax in special circumstances. If you receive a highly appreciated asset as a gift, such as a rental home that’s been in the family for two decades, you may generate capital gains tax if you sell the asset.
How do I avoid capital gains on gifted property?
Another tax strategy for avoiding capital gains on gifted property is to live in the home for at least two years to establish residency. If you sell the asset after that two-year period, you’ll likely qualify for the capital gains exclusion of $250,000 for single filers and $500,000 for married couples on the sale of a primary residence. 2
How can I avoid capital gains tax?
If you give the property to a charity, either directly or through a Donor Advised Fund, you may also qualify for a significant charitable deduction. A final way to avoid capital gains tax is to hold real estate within a self-directed IRA. If you have funds in an old estate or invest in various real estate projects.