Are you planning to make financial gifts to family members or loved ones? If you’re also looking to reduce your capital gains tax, consider gifting appreciated stock instead of cash. This strategy could eliminate or significantly reduce federal tax liability on the appreciation.
📉 Understanding Lower Capital Gains Rates
Most investors pay a 15% tax on long-term capital gains, or 20% if their income exceeds certain thresholds. However, gains that fall within the 10% or 12% ordinary income tax brackets may qualify for a 0% long-term capital gains rate.
🧾 What About the Net Investment Income Tax (NIIT)?
Taxpayers with modified adjusted gross income (MAGI) above:
- $200,000 (single filers)
- $250,000 (married filing jointly)
- $125,000 (married filing separately)
…may owe an additional 3.8% NIIT. This tax applies to the lesser of:
- Net investment income
- The amount by which MAGI exceeds the threshold
👨👩👧 Gifting Appreciated Assets to Loved Ones
If you have family members in the 0% tax bracket, you can transfer appreciated assets to them. They can then sell the assets with little or no federal tax liability.
📚 Real-Life Example: Ed, Nancy, and Emma
Ed and Nancy face a 23.8% long-term capital gains tax (20% top bracket + 3.8% NIIT). They decide to gift appreciated stock to their granddaughter Emma, who earns $30,000 annually from her entry-level job.
🧮 How the Numbers Work
For 2025, the 0% long-term capital gains bracket for single filers tops out at $48,350. Emma’s $20,000 capital gain fits mostly within this bracket:
- $18,350 taxed at 0%
- $1,650 taxed at 12%
Emma pays just $198 in federal tax. Had Ed and Nancy sold the stock themselves, they would have owed $4,760.
⚠️ Additional Considerations
Before gifting appreciated assets, keep these in mind:
- Kiddie Tax: Applies to recipients under age 24 as of December 31.
- Gift and GST Taxes: Check for potential gift and generation-skipping transfer tax implications.
💬 Need Help?
We’re here to answer your questions and explore other strategies to reduce taxes on your investments.