As the end of the year approaches, you may want to make some gifts to relatives (who may be hurting financially) and/or favorite charities. Make some smart choices about how to make your gifts in conjunction with an overall revamping of your stock and equity mutual fund holdings. Here’s how to get the best tax results from your generosity:
Gifts to Relatives.
We advise that you Do Not give individuals loser shares (Those stocks that are currently worth less than what you paid for them.) Instead, sell the shares and take advantage of the resulting capital losses. Then, give the cash sales proceeds to the relative.
We advise that you Do give away winner shares to relatives when they will pay lower tax rates than you would pay if you sold the same shares. In fact, relatives who are in the 10% or 15% federal income tax brackets will generally pay a 0% federal tax rate on long-term gains from shares that were held for over a year before being sold in 2012. (For purposes of meeting the more-than-one-year rule for gifted shares, you get to count your ownership period plus the recipient relative’s ownership period, however brief.)
A Word of Caution: Before employing this give-away-winner-shares strategy remember gains recognized by a relative who is under age 24 may be taxed at his or her parent’s higher rates under the so-called Kiddie Tax rules (contact us if you are concerned about this issue).
Gifts to Charities.
The strategies for gifts to relatives work equally well for gifts to IRS-approved charities. Sell loser shares and claim the resulting tax-saving capital loss on your return. Then, give the cash sales proceeds to the charity and claim the resulting charitable write-off (assuming you itemize deductions). This strategy results in a double tax benefit (tax-saving capital loss plus tax-saving charitable contribution deduction).
Give away winner shares to charity instead of giving cash. Here’s why. For publicly traded shares that you’ve owned over a year, your charitable deduction equals the full current market value at the time of the gift. Plus, when you give winner shares away, you walk away from the related capital gains tax. This idea is another double tax-saver (you avoid capital gains tax on the winner shares, and you get a tax-saving charitable contribution write-off). Because the charitable organization is tax-exempt, it can sell your donated shares without owing anything to the IRS.