“Informed” Tax Savings

Gifting can be a smart way to reduce your taxable estate and help the next generation. Just be sure to check with the experts before gifting stock or other long-held assets.

Key Takeaways

  • The old adage about two tax systems in the U.S.—one for the informed, one for the uninformed—continues today.
  • Gifting stock to younger generations in your family can be a smart way to reduce your taxable estate.
  • Just make sure you’re aware of income thresholds that can cause capital gain issues to kick on for the gift recipients.

Back in the 1940s, a New York Circuit Court Judge named the Honorable Learned Hand (yes his real name) often said, “There are two tax systems in the United States, one for the informed and one for the uninformed.” Seven decades later. Not much has changed, so it’s best to be in the informed group.

The informed approach

Let me give you a different kind of tax tip that we’ve used effectively with many of our clients. Let’s say someone with a large estate wants to give $14,000 a year of an annual exclusion without any gift or estate tax. They’re trying to maximize this gift every year to their children. So they have three children and want to make three gifts of $14,000 each—that’s $42,000.

What they’ve done in the past is to sell shares of a stock they have owned for many years—a stock with a cost basis of $12,000. Now it’s worth $42,000. So, when they sell, the gain is $30,000 ($42,000 minus $12,000). Based on federal tax and the state income tax where they live, that’s a 20 percent tax on $30,000– i.e. $6,000.

So they have to sell more stock, to come up with $42,000 net in order to send $14,000 each to their three children.  But, after looking at each child’s tax returns, we suggested that the parents take advantage of another law that was passed on January 2nd of this year. The law states that if your federal taxable income puts you in the zero-percent, 10-percent or 15-percent tax brackets, then any capital gains you incur are tax exempt. That’s right zero!

Real world example 

Suppose an affluent parent’s adult child earns $90,000 a year gross and is married with one child. And let’s say all of the adult child’s itemized deductions and personal exemption reduce their taxable income to $58,000. Why is that important? Well if the child who received the $14,000 stock gift sells the stock now, there’s a capital gain. When you add the capital gain to the $58,000 taxable income, they come out under than the $72,500 threshold. Remember, taxable income below $72,500 has a zero-percent federal tax. If you’re above $72,500 you go to the 25 percent bracket.

If you have three children and you’re gifting this $42,000 in stock, it would have cost you $6,000 in taxes, but it costs your three adult children zero. Thus, your family saves $6,000 in taxes.

Tax laws vary from state to state, of course, but generally, if you’re transitioning wealth within the family from one generation to the next, you can save $6,000 collectively by being smart about using these different tax entities; the taxable income.


Since this wealth transfer strategy became available three years ago, we’ve used it a lot. Now that it’s been made permanent, you may want to consider it for yourself. If so, call your trusted advisor to see if it makes sense for you and your family. Or certainly call us to go through the pros and cons of this particular gifting strategy, or any other tax mitigation technique that you’ve heard about. So until next time, enjoy the holiday season. Gary

If you have a few minutes over the Holidays, my book Changing the Conversation, has more on tax saving strategies.  | 1-800-480-7913


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