The holidays are right around the corner and most of us are starting to think about that perfect gift.    Some of us may still have gifts we received years ago from our parents or grandparents.   I’m talking about those individual stocks that they gave your for “your future”.   Most likely you received them while your gift giver was still living.  In this case your cost basis is their cost basis.

What does that mean?   Let’s say your grandma bought Pfizer stock on October 31, 1995 for $10/share.*  She gave it to you for Christmas in December 1997.  Now you wonder what to do with it.

PFIZER STOCK date Price per share # of shares TOTAL VALUE
10-31-1995 $10 100 $1,000
12-25-1997 $24 100 $2,400
10-31-2017 $35 100 $3,500

You have 4 options:

  • 1. Keep it
  • 2. Sell it
  • 3. Give it to someone else
  • 4. Donate it

 

KEEP IT:  If you keep it, nothing changes.   The value will fluctuate based on the market, but until you dispose of it, there should not be any significant changes.

SELL IT:  If you sell an asset within a year of purchase, any gain will be taxed at your ordinary income tax rate.   If you sell an asset one year or more after purchase, you may be subject to a capital gains tax.  Let’s say you chose to sell Pfizer stock on October 31st of this year.  Because the stock was held for longer than a year and the value is more than it was when grandma bought it, you have a capital gain.  Based on historical prices, your proceeds would have been $3,500 (see chart above).   Because this stock was a gift, your cost basis is the cost basis or purchase price of the gift giver, in this case, $1,000.   Your capital gain is $2,500 (see below).

Sell price:                                $35 x 100 shares =      $3,500

minus

Original purchase price:          $10 x 100 shares =      $1,000

Capital Gain:                           $25 x 100 shares =      $2,500

Your capital gain tax rate or the amount of tax you are required to pay on the gain (the $2,500) will be based on your marginal tax rate.  See the chart below.

Capital Gains Tax Rate Marginal Tax Rate Capital Gain Tax on $2,500 gain
0% 10% 0
0% 15% 0
15% 25% $375
15% 28% $375
15% 33% $375
15% 35% $375
20% 39.6% $500

GIVE IT TO SOMEONE ELSE:   If you give the stock to someone else, they assume the cost basis of grandma ($1,000) and have the same 4 choices you did.   As long as the total value is less than $14,000, you are eligible for the IRS gift exclusion and no one pays any gift tax.

DONATE IT:  If you want to avoid paying any capital gains tax, you can donate your stock to a non-profit organization (church, charity, school or any entity classified by the IRS as a non-profit 501(c)(3) organization).   If you receive nothing in return for this donation, you can claim this donation as a deduction on Schedule A of your federal taxes.  Because non-profit organizations are not required to pay taxes, when they sell the stock, they will not pay any capital gains tax.   In our example, you donate 100 shares of Pfizer on October 31st of this year.   You enter a charitable contribution of $3,500 on Schedule A, which reduces your taxable income.  The money you would have spent out of pocket for this donation stays in your pocket.  No one pays any capital gains tax.  In some instances, non-profit organizations (such as church owned private schools) may accept stock in lieu of cash to pay tuition.    If this applies to you, the appreciated stock is donated, capital gains taxes are avoided, but because you receive education in return for your donation, the appreciated asset cannot be deducted on your Schedule A.

We all like gains.   And once you understand the tax implications associated with realized gains, you can begin implementing financial strategies that help you manage your appreciated assets in such a way so as to keep more money in your pocket, offer you tax savings, and help enhance your financial plan.  If you have an appreciated asset and want some guidance on the best strategy for you, please give us a call.  We’d love to help.

*Historical prices of Pfizer:

PFIZER STOCK date High Low
10-31-1995 $10.10 $9.50
12-24-1997 $24.38 $23.46
10-31-2017 $35.34 $34.10

 

Securities and Advisory Services offered through The Strategic Financial Alliance, Inc. (SFA) – Member FINRA, SIPC.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. The SFA does not provide tax or legal advice.