Last Thursday, we covered the basics of taxes, investing and Drip, and provided some tips on where to go for more help. Following up on that today, I'd like to focus on an area of importance to those who have given or received Drips or investments as gifts this past year. Let's take a gander at tax rules for gifts of stock.
Incoming gifts are not income
Good news! The IRS gives you a break on this one. Gifts that you receive are not considered income, whether they're in the form of bad Father's Day ties, cash, or stocks. If those gifts produce income, however, the income produced from those gifts must be reported. If the stock you receive as a gift pays a dividend, that income must be reported. If the pink and green striped tie you receive pays a dividend, the fat check you receive from the National Enquirer must also be reported.
Now, before you start calling your paycheck a gift every other week and not reporting it, be aware that a true "gift" must not be in exchange for any services or other considerations.
Generous, not charitable
Now some bad news. Unless the gift you are giving is to a qualified charity, the gift is not tax deductible. You'll have to settle for a "thank you" and the knowledge that you're a noble and generous citizen, a true asset to society.
Records, records, records
Like an old broken record, I can't repeat enough how important good recordkeeping is when it comes to investing, and particularly Drip investing. This rings true with gifts of stock as well.
When giving or receiving gifts of stock, the following pieces of information should also be exchanged:
1. The tax basis (or cost) of the stock.
2. The fair market value (FMV) of the stock at the date of the transfer.
3. The date the stock was acquired by the donor.
4. The amount of the gift tax paid, if any.
These are important because the recipient's tax 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) The recipient's basis for gain is the same as the donor's adjusted basis.
b) The recipient's basis for loss is the FMV at the time of the gift. (Note: In this situation, it is sometimes better for the donor to sell the stock and claim a loss, then make a gift of the sale proceeds.)
2. If the FMV of the stock is more than the donor's basis at the time of the gift, then the recipient's basis is the same as the donor's basis.
Knowing the date the donor acquired the stock is important because when receiving a gift of stock, you also accept the holding period of those shares. It's possible that you could sell the gifted shares the day after receiving them and qualify the capital gains as long-term, provided the donor had purchased them prior to one year and one day from your sale date.
Gift tax? Whatchu talkin' 'bout Willis?
Although the recipient of a gift of stock gets off the hook when it comes to taxes on the gift, the donor may not be so lucky. The gift tax does not apply to most gifts because of what is known as the $10,000 annual exclusion. A donor can exclude gifts of up to $10,000 per year to each gift recipient, and married donors are able to exclude $20,000 per year if the donor's spouse agrees to splitting the gift. There is an unlimited exclusion for the payment of medical expenses or educational costs, provided you make these payments directly to the service provider or educational institution.
If you give more than the annual exclusion amount to one person in a single year, you'll have to file a gift tax return. But you still won't have to pay gift tax unless you exceed the lifetime limit. This rule lets you give a significant amount during your lifetime without ever paying a gift tax. The current amount is $675,000. Only the amount greater than the annual exclusion counts against the lifetime limit. If you gave someone $17,000 worth of stock this year, only $7,000 would count toward the lifetime limit.
If the gift tax applies to your gift, you may be able to increase your basis in the stock you receive. The increase applies only if the stock had a value greater than the donor's basis at the time of the gift.
More tax help and answers
Have questions or concerns regarding investing and taxes? Check out these nifty links: