The 0% capital gain tax bracket opens up a planning opportunity for higher income parents and grandparents who may be considering gifts or providing support to younger family members in a lower tax bracket.
In lieu of the donor selling an investment to raise cash to make a gift and incurring capital gain, the donor should consider making an in-kind gift as the donee may be able sell the asset and enjoy the 0% capital gain rate.
For instance, let’s say that Homer and Marge want to support their daughter Lisa. Lisa has recently finished her masters degree and has been offered a position at a prestigious think tank in Washington, D.C. Lisa’s starting salary is $30,000, which does not meet her living expenses in D.C. Homer and Marge decide to give Lisa roughly $1,500 per month ($18,000 annually) to help with rent and student loan payments.
To raise the cash for Lisa’s support, Homer and Marge have two choices. Homer can sell some of his shares of Springfield Nuclear. He acquired these shares at $1 per share and they are now worth $20 per share. Homer is in the 23.8% capital gain tax bracket. To net $18,000 to help Lisa through the year, Homer needs to sell $23,259 of stock (1,163 shares). The tax bill on the recognized gain from the sale of the stock is $5,259.
The second option is to gift Lisa 900 shares of Springfield Nuclear, followed by Lisa’s sale of the shares. This turns out to be tax advantageous as Lisa would enjoy the 0% capital gain rate. Lisa’s earned income of $25,000 is increased by the capital gain from the sale of $17,100 (900 shares x $19 of gain per share). This puts Lisa’s total income at $47,100. However, after subtracting Lisa’s personal exemption ($4,050) and standard deduction ($6,350), her taxable income is $36,750. Lisa’s taxable income falls within the 0% capital gain tax bracket and no capital gain tax is due on the sale. The tax savings are equal to almost 30% of the total gift.
In addition to tax savings, another advantage to an in-kind gift is that it may necessitate that the donee to open an investment account to receive the assets being transferred. This may help educate and encourage the donee to start saving and investing early in life. In addition, it may be an excellent opportunity for the donor to introduce the donee to other financial professionals such as investment advisors and accountants who can help the donee with financial and tax decisions throughout life.ent advisors and accountants who can help the donee with financial and tax decisions throughout life.
