Net long-term capital gain is generally taxed at a relatively low 15% or 20% rate in 2015. But low-bracket taxpayers enjoy an even better deal: Their net capital gain is tax-free (i.e., the tax rate on the gain is 0%) to the extent it would have been taxed at the 10% or 15% rate if it had been ordinary income instead of capital gain.
Are tax-free capital gains out of your reach if your marginal tax rate is higher than 15%? Maybe not. Here are a few family gifting strategies that could save you money:
Gift to parent. If you’re helping your folks financially, a gift of appreciated stock might be a tax-smart way to do it. As long as your parents’ taxable income stays below $74,900* in 2015, they can sell the stock and a 0% rate would apply to the capital gain.
Gift to child/grandchild. Until children reach age 19 (24 if they’re full-time students), the 0% rate generally would apply to only a limited amount of capital gain because of the “kiddie tax” rules.** But these rules aren’t an issue for older children (or for children ages 18-23 who have earned income exceeding one-half of their support).
You can make tax-free gifts of up to $14,000 (per recipient) in 2015 without using up any of your $5.43 million estate- and gift-tax exemption amount.
* Substitute $37,450 for $74,900 if your parent is a single taxpayer. These figures represent the top of the 15% bracket for single and married-joint taxpayers, respectively.
** Under the kiddie tax rules, children pay tax at their parents’ highest rate on unearned income over $2,100 (in 2015).