For most of us, ensuring the financial security and prosperity of our loved ones is extremely important. Gifting stocks to children in a low tax bracket (i.e., college students, graduate students, unemployed, etc.) allows us to share our success. It presents an opportunity for tax-efficient wealth transfer.

Let's dive deep into the benefits of gifting and unearth comprehensive strategies for maximizing tax savings through the annual gift tax exclusion. By harnessing this powerful tool, individuals can gift stocks yearly while "flying under the tax radar" and safeguarding their family's financial future.

Take the first step towards financial security. Click here to schedule your free consultation with our experienced advisors.

Understanding the Annual Gift Tax Exclusion

It's important to understand a few fundamental principles to grasp the true potential of the gift tax exclusion. This annual exclusion is a strategic mechanism for anyone who wants to gift assets without incurring any gift tax liability.

The annual gift tax exclusion permits individuals to gift up to a specific dollar amount per recipient per year, completely tax-free. This amount is adjusted periodically to account for inflation, enabling individuals to leverage this tool effectively.

For the year 2023, the exclusion amount is $17,000, meaning you can gift individuals up to $17,000 each and not have to pay taxes on those funds or assets.

Tax-Free Gifting of Stocks: A Pathway to Financial Independence

The gift tax exclusion doesn’t just apply to gifts of cash. Gifting stocks can also present many advantages for both the benefactor and the beneficiary.

By transferring stocks to children, you not only impart a valuable asset but also lay the groundwork for their future financial success. Additionally, you can eliminate any tax liability associated with the transfer by taking advantage of the annual gift tax exclusion.

Let's illustrate this with an example.

In 2023, the annual exclusion amount is $17,000 per recipient. That means that this year, you and your spouse can each gift up to $17,000 worth of stocks ($34,000 total) to each child without tax consequences. This strategic move allows you to give a generous gift to your children—one that will hopefully turn into a lifetime of savvy investing—while also removing these assets from your estate, potentially reducing future estate taxes.

How Tax-Free Gifting Can Help You Reduce Your Tax Bill

One of the most remarkable aspects of utilizing the annual gift tax exclusion is its ability to reduce the amount you owe in taxes significantly. Since these gifts fall within the exclusion limit, they aren’t flagged by the IRS and don’t require any reporting or documentation. This unique advantage empowers you to transfer assets seamlessly without drawing undue attention or triggering unnecessary scrutiny.

It is crucial to highlight that you can exercise the annual exclusion every year, creating a golden opportunity to transfer substantial wealth over time. By consistently gifting stocks within the exclusion limit, your estate can gradually be reduced in size, transferring assets to loved ones. At the same time, you're still alive and potentially minimizing estate taxes overall.

Your Child Can Take Advantage of 0% Long-Term Capital Gains Tax

In 2023, you can avoid long-term capital gains taxes by gifting highly appreciated stock. Under the current tax law, if you have Adjusted Gross Income (AGI) of less than $44,625 as a single filer and are NOT claimed as a dependent, you will pay $0 in long-term capital gains taxes for the sale of your highly appreciated stock that was gifted.

We will illustrate this with an example.

Let's say you purchased stock many years ago at a cost basis of $1,000. The stock has appreciated and is now worth $17,000. You gift the stock to your 22-year-old child, who you are NOT claiming as a dependent. Your child is currently working part-time while searching for a full-time job and anticipates earning $20,000 this year. After receiving the gifted stock, your child can sell the stock for a long-term gain of $16,000, bringing their AGI to $36,000, which is under the $44,625 threshold. This means they will pay no long-term capital gains taxes on the sale, saving your family thousands of dollars in taxes.

Opportunity to Step-Up Cost Basis

But what if your child doesn't want to sell the stock? In this scenario, there is still a huge opportunity to be had. Your child can step-up their cost basis by selling the stock immediately after it was gifted. This way, they will realize a long-term gain and pay no long-term capital gains taxes as we explained above. However, they can use the proceeds from the sale to immediately repurchase the stock back. They will then have a newly established position in the stock with a cost basis of the current market value of $17,000. Then, if they decide to sell down the road, they will only pay a capital gain above the newly established cost basis of $17,000.

Trust in the Expertise of a Professional Financial Advisor

The annual gift tax exclusion is a powerful resource for high-net-worth individuals and anyone who wants to gift stocks and other assets to their children while minimizing tax implications. By adhering to the exclusion limit, you can discreetly "fly under the tax radar," gradually reduce your estate's size, and secure the financial well-being of your family.

Once the gift of stock is given, it becomes the recipient's asset, potentially allowing them to benefit from future market gains and dividends.

While the benefits of tax-free gifting are undoubtedly compelling, it is vital to maintain an open line of communication with your financial advisor. Their expertise and guidance play a pivotal role when navigating the complexities of wealth transfer strategies and making informed decisions.

Your financial advisor can provide valuable insights tailored to your financial situation, ensuring your gifting strategies align with your wealth management goals. They can also offer innovative gifting ideas beyond stocks, such as cash, real estate, trusts, or educational expenses, providing a comprehensive arsenal of options to maximize the benefits of the annual exclusion.

Take Control of Your Financial Future

Schedule a free consultation with a Wealth Enhancement Group advisor today and discover a path to achieving the financial goals you may have yet to realize. Our team of specialists is ready to analyze your unique needs, provide personalized solutions, and guide you toward a future of financial prosperity.

Unlock the full potential of the gift tax exclusion, explore tax-free gifting options, and establish a solid foundation for a prosperous financial future for your loved ones. With careful planning, strategic execution, and the guidance of a trusted financial advisor, you can navigate the intricacies of wealth transfer and leave a legacy of financial empowerment.