Gifting Stock: How to Gift Stocks
Some people like to give! A popular tool around tax season is the gifting stock. A gift of stock has advantages for both the giver and the receiver. The giver may be gifting appreciated stock and avoid paying taxes. On the other hand, the stock could continue to grow and increase the value of the gift to the recipient.
Givers can gift stock to anyone for any reason. In addition to gifting stock to family, friends or other loved ones, givers could also choose to donate the stock to charity.
Gifting Stock to a Child or Grandchild
Gifting stock to a child or grandchild is an excellent opportunity to teach them about investing and financial planning. The younger the recipient is, the more time they have to allow the gifted stock to grow. In addition, the stock can continue to grow over time.
Readers should keep in mind that there are limitations on the amount of stock one can gift. The IRS allows a donor to gift up to $15,000 worth of stock for 2021 without incurring taxes. For 2022, the limit is increased to $16,000. The annual limit applies to each person receiving a gift. So, if a donor has several children and grandchildren, each can receive the maximum stock gift each year.
The annual gift tax exemption extends beyond children and grandchildren. In fact, the gifting stock applies to anyone a donor chooses to gift. The annual gift tax limit is different for spouses. A spouse can receive up to $32,000 per year, double the standard limit.
However, there is a limit on how much a donor can gift over their lifetime. For the tax year 2022, the lifetime gift exemption is $12.06 million or $24.12 million for married couples. That means, over a donor’s life, they can gift stock up to the lifetime limit without paying taxes on the gifts.
Donors also need to consider their Estate taxes. The lifetime gift tax exclusion is combined with the donor’s estate tax exclusion. In other words, every dollar the donor uses for an annual gift exclusion counts against their estate tax exclusion.
Gifting Stock Taxes
Recipients are responsible for paying taxes on the gift. Donor’s giving away appreciated stock do not pay gifting stock taxes. However, recipients can defer taxes until they sell the gifted stock. When the recipient sells the stock, it is subject to capital gains tax.
Capital gains tax can be short-term or long-term. If shareholders keep the shares for less than a year, gains or losses are short-term. If they hold the shares for a year or more, the gains or losses are long-term. Short-term capital gains are taxed as ordinary income, while long-term capital gains are taxed at a lower rate. The capital gains tax is based on when the donor purchased the shares, not when the recipient received the shares.
However, if the gift amount is over any of the exclusions, the donor is liable for gift taxes. The tax rates are tiered like income tax rates. For instance, the first tier is an 18% tax on gifts between $0 and $10,000 above exclusions. If the excess gift is more than $10,000, the donor pays $1,800 ($10,000 x 18%) plus 22% on excess gifts between $10,000 and $20,000.
How to Gift Stock
If you’re thinking about gifting stock, you’re probably wondering how to actually gift it. One way is to simply transfer the stock from your brokerage account to the brokerage account of the recipient.
Transfers might be the easiest way to gift stock, but they will take out the element of surprise for your gift. To do so, you’ll need to get the recipient’s account information. You should be able to take care of the transfer from your online account. If that is not an option, you may need to call your broker and take care of the transfer with the help of a representative.
If the person you want to gift stock to is a minor, another option is to set up a custodial account. A donor sets up a custodial account for a minor and manages it themselves.
If you don’t have it already, you may need information about the minor like name, social security number or date of birth. Your broker will need this information to set up the custodial account. Once the donor sets up the custodial account, they can transfer shares like you would with other brokerage accounts.
Taking Advantage of the Lifetime Exclusion
The lifetime exclusion will decrease after 2022. So, unless a donor passes away this year, they may not be able to take advantage of the entire lifetime exclusion.
If you’re in a position to gift large amounts of stock, money, or other assets this year, you may be able to gift up to your entire lifetime exclusion in 2022 before it decreases. In doing so, you’ll have the additional pleasure of watching your gifts benefit the recipients. Please consult your tax advisor before making any decisions.
About BJ Cook
BJ Cook is a long-time stock nerd. He has held several roles in the equity research world and earned the right to use the CFA designation in 2014. When he’s not writing for Investment U, you can find him searching for new investment ideas. Outside the investment community, BJ is a die-hard Cubs fan.