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May 16, 1998

Tax Q&A
by Roy Lewis


Gifts of Stock

A number of questions have come up about gifts of stock. Let's kick this one around a little bit.

If you receive (or give) stocks as a gift, you MUST know (or provide) the following information:

  1. The donor's (i.e., the person who gave you the stock) tax basis (or cost) of the stock.
  2. The Fair Market Value (FMV) of the stock at the date of the gift.
  3. The amount of the gift tax paid by the donor, if any.

Why do you need to know all of this? Because YOUR basis in the gifted stock will depend upon the donor's basis and the FMV at the date of the gift. The rules are as follows:

  1. If the FMV of the stock is LESS than the donor's basis at the time of the gift:
     A) Your basis for gain is the same as the donor's adjusted basis.
     B) Your basis for loss is the FMV at the time of the gift.
     C) If you use the donor's basis to compute a gain and get a loss, and then use the FMV to compute the loss and get a gain, here is neither a gain NOR loss.
  2. If the FMV of the stock is MORE than the donor's basis at the time of the gift, then your basis is the donor's basis. If the donor was required to pay gift tax, your basis is increased by the amount of gift tax paid that is attributable to that gift.

Let's talk for a minute about gift tax issues. You can give $10,000 to any person. The gift is not deductible by you, nor taxable to the recipient. If the gift is $10,000 or less, you don't even have to file a gift tax return, much less worry about gift taxes.Ifyou're married, you can "gift split." That is, you can give $10,000 to one person, and your spouse can give $10,000 to that same person. In effect, you have transferred $20,000 worth of wealth to the same person without having any type of estate tax or gift tax filing problems.

Let's look at an example of gifting stock. Dad buys 100 shares of XYZ stock for $5 per share on January 15, 1995. Then Dad gifts the stock to you on April 4, 1996. On the date of the gift, the stock was valued at $15 per share. You then receive the stock, and sell it on April 8th for $15 per share. Your capital gain is long-term,even though you only held the stock for a few days. This is because when you are given a gift, not only are you forced to keep the donor's basis, but you also keep the donor's holding period. So this transaction would be reported on Schedule D, using a purchase date of 1-15-95, a sale date of 4-8-96, and a long-term gain of $1,000.

Another example: You bought 500 shares of XYZ at $20. The stock is now worth $30 per share. You want to help Mom buy a car, pay off a loan, whatever; so you gift 300 shares of stock to Mom. You have gifted stock worth $9,000 (300 X $30), so you are under the $10,000 limit. The basis of the shares in Mom's hands is $20 per share. If she turns around and sells the stock for $30, she will have a gain of $3,000 (300 X $10) that will be taxable to her. This is a good example of "income shifting." This works really well if Mom is in a lower tax bracket than you. By giving Mom stock and letting her sell it, she will receive much more money "after taxes" than if you gave her the cash after you sold the stock and paid your taxes. This type of income shifting also works well for children, but be aware of the kiddie tax issues.

And please, make sure that you don't confuse gifts with charitable contributions. They are two totally different animals with different sets of rules and regulations.

Please note that Roy cannot answer individual questions via e-mail. If you have tax questions, please ask them on the taxes message board. Thanks!

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