Cut Your Capital Gains Tax with Gifting

Financial gifts are a powerful way to support your loved ones. But did you know they can also be a savvy tax strategy? If you're considering giving cash, you might want to think about gifting appreciated stock instead. This approach could significantly reduce—or even eliminate—the federal tax on the asset's growth.

This strategy revolves around leveraging the different long-term capital gains tax rates. While many investors face a 15% rate (or 20% for higher earners), there's a 0% rate available for individuals in lower income brackets. By strategically gifting appreciated assets, you can help your loved ones benefit from this lower rate while minimizing your own tax burden. It's a financial win-win that supports your family and optimizes your portfolio.

Understanding Capital Gains Tax Rates

Most investors are subject to a 15% tax rate on long-term capital gains. For those with higher incomes, this rate jumps to 20%. In addition, the Net Investment Income Tax (NIIT) can add another 3.8% for taxpayers with a modified adjusted gross income (MAGI) over certain thresholds ($200,000 for individuals, $250,000 for married couples filing jointly). This can bring the total federal tax on long-term gains to 23.8%.

However, the tax code offers a significant break for some. The long-term capital gains rate is 0% for gains that would otherwise be taxed at the 10% or 12% ordinary-income tax brackets. This creates a valuable opportunity for income shifting. If you have loved ones—like children or grandchildren just starting their careers—who fall into this 0% bracket, you can transfer appreciated assets to them. They can then sell the assets and pay little to no federal tax on the gain.

A Real-World Example

Let's look at how this works in practice. Ed and Nancy are in a high tax bracket and face a 23.8% tax rate on their long-term capital gains. They want to sell some stock that has appreciated by $20,000, which would result in a $4,760 tax bill.

Instead of selling it themselves, they decide to gift the stock to their granddaughter, Emma. Emma recently graduated from college and has an entry-level job, leaving her with a taxable income of $30,000. This places her squarely in the 0% long-term capital gains bracket.

The 0% rate applies to capital gains that "fill up" the space between her taxable income and the top of the 0% bracket. For 2025, this bracket for single filers ends at $48,350. This means Emma has $18,350 ($48,350 - $30,000) of "room" in her 0% bracket.

When Emma sells the gifted stock, the first $18,350 of the $20,000 gain is taxed at 0%. The remaining $1,650 is taxed at the next applicable rate, which would be 12%. Emma's total federal tax bill is only $198. By gifting the stock, the family saved $4,562 in taxes compared to if Ed and Nancy had sold it themselves.

Important Considerations Before Gifting

While this strategy can be highly effective, there are a few important factors to consider before you act:

• The "Kiddie Tax": If you plan to gift assets to a child or a full-time student under the age of 24, be aware of the "kiddie tax." This rule can cause a child's unearned income (including capital gains) to be taxed at their parents' higher rate, which could negate the benefits of this strategy.
• Gift Tax Rules: Remember that there are annual and lifetime limits on tax-free gifting. Be sure to consider any potential gift and generation-skipping transfer (GST) tax consequences.

Let's Build Your Financial Strategy

Shifting income through strategic gifting is just one of many ways to manage your tax liability and make your investments work harder for you. The tax code is complex, but with the right guidance, you can navigate it effectively to support your financial goals and your family.

At SD Mayer & Associates, we specialize in creating customized financial strategies that go beyond simple accounting. We're here to help you understand your options and make informed decisions. If you have questions about gifting assets or want to explore other tax-saving opportunities, our team is ready to help.