A few weeks back, I covered the topic of gift taxes in depth.
Today, I want to share a few specific strategies that you should keep in mind to save money on taxes related to gifting.
1. Shares gifting
An acquaintance of mine wants to give $19,000 to each of his 3 kids.
He has $1M in a brokerage account.
Originally, he was planning to sell the shares and then give each of his kids $19,000 in cash, but that’s tax inefficient. So why $19K specifically?
Because $19,000 is the annual gift tax exclusion for 2025.
It’s the maximum amount you can gift per person, per year, without it impacting your lifetime estate & gift tax exemption and without having to file a gift tax return.
So, he needs to sell $57,000 worth of stocks from his brokerage account to gift cash.
He makes $100K+ per year, so he’s in the 15% long-term capital gains tax bracket, which would apply if he sells. Assuming his cost basis is 50%, that means $28,500 in gains.
At 15%, that’s $4,275 in federal capital gains taxes, plus potential state taxes depending on where he lives.
What is a better strategy?
His children are independent, but they recently started their full-time jobs, so their income isn’t extremely high.
Instead of selling, he could transfer the shares directly to his children. The specific shares would receive a carryover basis and the same acquisition date.
If you’re single and make less than $48,350 of taxable income (after the standard deduction), a 0% long-term capital gains rate will apply.
For example, say one of his kids made $50,000 in a year before selling any appreciated stocks.
If they receive $19,000 in stock (with a $9,500 basis, or 50%), the capital gain would be $9,500.
So, their gross income becomes $59,500.
After the $15,000 standard deduction, their taxable income is $44,500, which is under the $48,350 threshold for the 0% long-term capital gains rate.
So, they pay $0 in federal taxes on the $9,500 gain.
And one of his kids lives in Florida, which has no state income tax!
By strategically gifting appreciated stock instead of selling it, he was able to save over $4,000 in taxes.
Two important points to keep in mind:
- Watch out for income-based credits (like the EITC or Saver’s Credit). Receiving appreciated stock and recognizing gains will increase taxable income, which could reduce or eliminate eligibility for those credits.
- This strategy doesn’t work if your children are your dependents. In that case, the “kiddie tax” rules apply, meaning the capital gains could be taxed at your tax rate, not theirs.
In summary:
2. 529 plan superfunding
Did you know that you can superfund a 529 plan?
It allows you to contribute up to $95,000 in a single year (in 2025) without impacting your gift or estate tax exemption. This works by treating a one-time contribution as if it were spread evenly over 5 years.
For example, say you have 2 grandparents with 5 grandchildren, and the grandparents are extremely wealthy.
Each grandparent could superfund $95,000 per grandchild, for a total of $190,000 per grandchild.
That means they could contribute nearly $1 million across all 529 plans, while lowering the size of their taxable estate.
Why do something like this?
If their estate is large enough to be subject to the federal estate tax (up to 40%), then reducing it by $1 million could mean saving $400,000 in federal estate taxes.
By contributing earlier, the funds have more time to grow tax free, maximizing the value for future education expenses.
Keep in mind that superfunding would require you to file a form 709 to get the 5 year election, and you might miss out on the state tax deduction for every year.
3. “Upstream” gifting
During our first example, it was a child receiving money from his parents.
But strategically, it could also work upstream, where the assets go first to your parents or grandparents before being transferred to your children. The main goal, again, is to lower your estate’s overall tax impact and receive a step-up in basis.
It doesn’t apply to everyone, but it could be a good strategy to consider.
Let me give you an example:
Say Linda purchased a property for $200,000, and today it’s worth $1,000,000, generating $50,000 of income. Linda has 1 daughter, Emma (age 35) to whom she wants to give her entire estate.
Linda’s father, Walter, is 83 years old and requires full-time care. Linda could technically transfer the $1,000,000 property to Walter.
This lowers the size of her overall estate (but also uses $1,000,000 of her lifetime gift exemption) and shifts $50,000 of income to Walter.
When Walter passes away, the property has appreciated to ~$1.5 million. Emma receives the property with a step-up basis of $1.5 million, meaning she can sell it tax-free right away.
Essentially, Linda avoided additional estate tax on $500,000 of appreciation, covered Walter’s nursing care, and transferred the property to her child tax-free. This only matters when the parent is subject to an estate taxes, while the parent isn’t.
So, this generally works when there’s a significant difference in wealth between generations, but you need to keep in mind:
- Once the grandparent owns the asset, they can do whatever they want with it.
- Assets owned by grandparents could be subject to claims from creditors.
- The income generated from the asset might impact other benefits and eligibility (e.g. Medicare).
In summary, it works like this:
Overall, I hope you found this newsletter valuable.
If you have any feedback, you can always reply back to this email.
See you next Saturday.