First, the bad news. If you are a high-income earner, your top tax rate may be 39.6% and you may be hit with an additional .9% Medicare tax on part of your income. Your long-term capital rate and dividend earnings rate could be as high as 20% with another 3.8% Medicare surtax on those long-term capital gains and dividends.
You may have stocks that you want to sell, but you are afraid that with the capital gains tax it just wouldn’t be worth it. For example, you earned a lot of stock options from an internet start-up that you worked for. As a result, you own the internet company stocks and have a really low basis in them, meaning you did not pay a lot for them. But now with the resurgence of internet stock prices, you are afraid there is a bubble in the price of your stock – that makes it a great time to sell. But you can’t sell because you are unwilling to take the hit from the 20% capital gains tax rate and the 3.8% Medicare surtax.
If you have children, grandchildren or loved ones that are in the bottom 2 tax brackets (10% or 15%), they would pay 0% on the capital gains. They would pay 0% on dividend income – as long as they stay in those tax brackets.
You could give away some of those stocks that have appreciated or pay dividends – or have appreciated AND pay dividends. The gift recipient could then take advantage of those 0% rates. You can give each person $14,000, or $28,000 if you are married (filing jointly) without any tax consequences for the donor or the recipient.
Was that an eye roll I detected?
Why? Because you don’t think that your loved ones could possibly be destitute enough to fall within the lower 2 tax brackets?
If you have a married son or daughter with a couple of dependent kids they could have up to $103,500 (including long-term capital gains and dividends) and still be in the 15% tax bracket and that is assuming they only take the standard deduction.
Even if your daughter is single with no kids, she could have up to $47,750 of adjusted gross income (including long-term capital gains and dividends) assuming she claims her standard deduction.
Your children or grandchildren can earn a substantial income and still be in a position to take advantage of the 0% Long-Term Capital Gains and Dividend Tax Rate.
Here is a word of caution – beware the kiddie tax. This strategy will not work if the loved one is under the age of 18 or if under the age of 23 and receive half of the support from parents.