How to figure gift tax on stock shares

February 1, 2008

I bought some shares of stock for $1,000 in 1990, and now they're worth about $30,000. If I give them to my son, will this be considered a gift of $29,000 or $1,000? And on which amount will he owe capital gains tax?

I bought some shares of stock for $1,000 in 1990, and now they're worth about $30,000. If I give them to my son, will this be considered a gift of $29,000 or $1,000? And on which amount will he owe capital gains tax?

Your gift amount is the shares' full fair market value on the date you hand them to your son; for gift-tax purposes, your $1,000 original cost basis doesn't count. So if you give him the shares now, you're making a $30,000 gift. Because of the annual gift tax exclusion for 2008, $12,000 will escape gift tax ($24,000 if you're married, you and your spouse own the shares together, and you gift them jointly), but the remaining $18,000 (or $6,000) will be a taxable gift. You won't owe tax now (unless this gift puts you over the $1 million lifetime limit for tax-free gifts), but the amount of assets that will escape estate taxes after you die will be reduced accordingly. File Form 709 to report the gift.

When your son sells the shares, he'll calculate his taxable capital gain by subtracting your $1,000 basis from his profit. So if he sells them immediately for $30,000 and has no other capital gains or losses for 2007, he'll owe tax on $29,000. Your holding period for the stock also transfers to him, so he'll have a long-term capital gain taxable at 15 percent if he's in the 25, 28, 33, or 35 percent bracket. Better still, if he's in the 10 or 15 percent bracket he'll pay no tax at all, thanks to a tax rate reduction that applies to capital gains received in 2008 through 2010.