Personal Finances - 2021

Savvy Ways to Gift Assets and Harvest Tax Losses

By Mo Vidwans

If you have good intentions of transferring assets to family members, before your time has come, then shifting assets “up the ladder" or “down the ladder" is a good way to do it. Aid to struggling parents or to the deserving younger generation could be the right ticket. Maybe we have to keep an eye on that Kiddie Tax because that tax also has changed façade a few times in the last few years.

We are basically talking about transferring assets or making gifts to either parents or adult children who are in need of it and in a much lower tax bracket than you are. It can be done in many different ways.

You can start by just giving away $15,000 each to any and as many folks as you desire every year. Yes, hard to believe but very true. This is, of course, a one-way journey which means that once parted with that money then it is not coming back; at least one should not be anticipating it. Generally, this kind of gift works out the best when a down payment for a house needs to be anchored down and the children are strapped for cash. Dad and Mom each can give a gift to son/daughter and spouse, which will create a down payment of $60,000 right away. If timed right for end of a year and the beginning of the new year, it can be doubled in a few days. There is no paper work required. I would recommend though that the gifting person just keep a record somewhere.

Under the same umbrella of $15,000 or separately, transfer to parents or children may involve gifts of dividend-paying stocks or stock funds or ETFs. The payouts are usually qualified dividends on which the new owner may owe generally 15 percent taxes or nothing depending on the taxable income that is claimed on their 1040. The dividend paying equities might move to a younger generation to generate untaxed dividends or you can transfer highly appreciated securities that are planned for sale so that seniors or children may cash in without paying taxes on the gains. The kiddie tax which applies to dependents under the age of 19, or full-time students under 24, may affect downstream gifting.

To determine if a dependent child is subject to the kiddie tax, first step is to add up child's net earned income and net unearned income; then subtract the child's standard deduction to arrive at the taxable income. The portion of taxable income consisting of net earned income is taxed at regular rates, but net unearned income over $2,200 this year is taxed at parents' marginal income tax rate. The message here is that for the kids, tax planners should focus on keeping interests, dividends and capital gains under $2,200 where taxes are low for them. Gifting highly appreciated securities to adult children, who are not affected by the kiddie tax, is a good strategy, especially if the children are in the low income tax brackets. It is assumed that these assets have a long-term holding period (over one year) carried over from parents.

I think the main message I am trying to convey is that with some careful advanced planning, many tax hassles can be avoided.

Let us move on to another good way of avoiding capital gain taxes. Out of panic, when the market goes down unexpectedly or for whatever reasons, people may have much appreciated stocks sold to lock into the profits. There is nothing wrong with it of course; but what is generally not thought of is the capital gain taxes that you may end up paying or the sudden rise of the taxable income (or AGI) because of the capital gains that need to be reported on the income. This sudden rise may affect many other variables such as Medicare premiums which are the most visible; loss of some tax credits or not able to invest in a ROTH IRA or higher deductible for medical expenses, among others.

When the securities are sold in such a hurry the effect cannot be reversed easily. Given these circumstances, the right thing to look for is if there are any securities that are not doing so well and in fact if we sell them now we could capture some losses. Human nature is such that we do not want to admit that we made a mistake in buying a security; and it may not be even a mistake but if we have such stocks then we should seriously think of selling them to get some losses on the books which can be used to balance the gains on other stocks and thus reduce the sudden rise of income.

This is known as capital loss harvesting and it is commonly used to reduce income. Two points to note: you can have more losses than gains in which case you can claim up to $3,000 loss on 1040 and thus in fact reduce your total income by that amount. Additional losses can be taken forward indefinitely up to $3,000 every year or can be used to balance more gains. The second point was that even if you have sold a security in loss, you can buy it back, if you really like it much and wish to own it after waiting for 31 days with no adverse implications, but not before that without penalties.

With much advance planning and with carefully thought-out long term goals, you can certainly master this “paying too much tax" issue. You need to do your preliminary 1040 filled in before the year is over, while doing some advance planning for next five years is not that far-fetched.

Mo Vidwans is an independent, board certified financial planner. For details visit, call 984-888-0355 or write to