Looking for a unique gift idea for a loved one that will long outlast the shiny new bike for Christmas, live well beyond the high-end blender given for a wedding present, and will far surpass the lifespan of the big box gift card given for a high school or college graduation? Consider thinking outside-of-the-box this year by giving the gift that keeps on giving: the gift of securities (cue the wind chimes). As with any type of gift, there is a giver and a receiver, and we will look into both aspects.
Knowing the Price Tag on the Gift
Etiquette is important when receiving gifts. You write a sincere Thank You card in a timely manner, even if the gift may not be something you like, or maybe you already have one. You may even say something like “this must have cost a fortune!” But you never really expect the gift giver to answer with a specific dollar amount and date of purchase. With the gift of securities, however, the purchase price of the stock, as well as any adjustments to that cost, is an important factor in determining your tax liability on that gift. While these may be uncomfortable questions to ask, you should immediately get some background information on the securities you have just been given.
There are some gift tax considerations that need to be made, preferably before you sell your gift. What is the cost basis of your gifted shares? Should the cost basis be zero since you paid nothing for them? Likely not. While the IRS would love to have 100% gain on your sale, they could never get away with this without facing a mob with pitchforks. IRS regulations regarding securities received as a gift can be found in Publication 550 and Publication 551, but if you are like many other unsuspecting taxpayers, you may find these publications quite difficult to understand. One other thing: gifts and inheritances are not the same, and the following information should not be applied to inheritances. Know the difference!
First Things First: What Is Fair Market Value and Why Should You Care?
Knowing the Fair Market Value, or FMV as it is commonly known, is the first step in determining the cost basis of your gifted securities. The IRS states that if there are sales of the security on the valuation date, the FMV is the average between the highest and lowest sales on the date of the gift.
The factors which must be considered when determining the cost basis to report when the gifted securities are sold include: the donor’s adjusted basis prior to gifting the shares, the FMV on the date the shares were gifted, and the amount of proceeds received at the time of the sale.
It’s As Easy as 1-2-3
Let’s break it down into three easy steps in order to simplify and better understand the gift tax.
How Do Gift Rules Affect the Individuals Who Give the Securities?
Let’s say Grandpa Ted was feeling generous this year and gifted each of his five grandchildren 100 shares of stock XYZ. Grandpa Ted originally purchased these 500 shares in the 70’s (he is old school like that) and paid $5 per share. Forty-five years later, XYZ has appreciated in value and is trading at $150 the day he gifts the shares.
Grandpa Ted would be responsible for paying the gift tax on the value of these gifted securities. However, there is an annual exclusion amount which applies to each gift given. In 2017, this amount is $14,000 per gift. If Grandpa Ted and his wife, Grandma Shirley, are both owners of the securities and are giving these gifts together, the gift tax exclusion amount is $28,000 per gift. What does this mean for Grandpa Ted? The total FMV of the securities Grandpa Ted and his wife gave to their grandchildren was $75,000. Each grandchild received 100 shares with an FMV of $15,000. Since Grandpa Ted and his wife both owned these securities and gifted them together, and the FMV of each gift was less than the annual exclusion amount of $28,000, Grandpa Ted and his wife would not owe the gift tax on these gifted securities.
Securities Given as a Charitable Contribution
Securities given as a charitable contribution to a public charity may also qualify for a tax deduction. If Grandpa Ted also decides to give an additional 500 shares of stock XYZ (also purchased back in the 70’s) as a charitable contribution, he could be eligible to claim a deduction on this charitable contribution as long as he itemizes his deductions. The IRS states if you’ve held the security for more than one year, which is true for Grandpa Ted, the donated securities may qualify for a tax deduction of up to the FMV of a security. In Grandpa Ted’s case, the FMV of the securities he gifted is $75,000. If the securities were held less than one year, the amount of the tax deduction would be the adjusted cost basis of the securities if the cost basis is less than the FMV.
It is important to note the amount which qualifies as a tax deduction is subject to certain percentage limitations based on the donors adjusted gross income. IRS regulations regarding charitable contributions can be found in Publication 526. Be sure you are well advised in the current rules before completing such gifts.
Whether you are the recipient or the giver of gifted securities, you’ll want to be sure you are familiar with the tax regulations. The scenarios given above are for informational purposes only and may not be suitable for each individuals tax situation, so be sure to consult a qualified tax advisor to determine how each situation applies to you.
This article is an update of the original Gift Giving Guide: The Gift Rule Simplified published on January 20, 2017.