Give the gift of stocks this holiday season
Forget the iTunes gift card this holiday season. Why should you give a gift with no potential to grow when you can give a share of, say, Apple instead?
Giving stock doesn't have to break the bank either, as there are multiple ways to give shares as presents, including gift cards for purchasing fractional shares of stock. From a tax standpoint, giving the gift of stocks also has the potential to benefit the giver. With the U.S. stock market at an all-time high, investors may want to lighten their tax burden from gains by transferring shares to charity or to a family member.
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In fact, this could be your last year to take advantage of that tax move. Two tax bills that Congress is working to reconcile call for nearly doubling the standard deduction while eliminating many other deductions. The final bill will likely reduce the number of people who itemize and take advantage of the charitable deductions, says Ray Hawkins, vice president of financial and estate planning at AEPG Wealth Strategies in Warren, New Jersey.
"Donors who believe they might be affected by this scenario next year should consider increasing their charitable gifts this year," Hawkins says.
Before you stuff someone's stocking with shares of stock, here's what you should know.
How much can you give? The annual gift tax exclusion for 2017 is $14,000. That means each parent or grandparent can give up to $14,000 per person without filing a gift tax return – Form 709 with the IRS – says Michael Solari, principal of Solari Financial Planning in Boston.
For example, one parent could give $14,000 to each one of four family members – two adult children and two grandkids, for example – for a grand total of $56,000. That gift doesn't have to be cash and can take other forms, such as stock, mutual funds or exchange-traded funds. "This is a great strategy if you have a very low basis in a stock and are in a higher income tax bracket," Solari says. "The kids could sell the stock and pay as little as zero percent capital gains tax on it."
It's also a way to interest new investors in the stock market. By giving these newcomers a stake in a investment, they can follow its performance and learn from that experience to become better investors.
One caveat, however: Hold off making such gifts if you have children nearing college age or attending college. Because children's assets are assessed at a higher rate than the parents, it could disqualify you from financial aid, which could be tens of thousands of dollars, Solari says. "If you are in this situation, it is best to wait, if possible, until your last child is in his or her final semester of senior year," he says.
Bypass the brokerage to give shares. If you don't want to open a brokerage account for the gift recipient, you have other ways to give stock. Some companies including Southwest Airlines Co. (LUV), Verizon Communications (VZ) and Harley-Davidson (HOG) allow investors to buy stock directly, also called a direct stock purchase plan. Many such companies have minimum purchase requirements ranging from $100 for Paychex (PAYX) to $500 for Coca-Cola Co. (KO).
Websites such as GiveAShare.com also let you buy individual shares of more than 110 companies, from the pricey Amazon.com (AMZN) to the more affordable Yum Brands (YUM), known for its fast food restaurants, including Taco Bell and Pizza Hut. The recipient gets a framed stock certificate from companies that still issue paper certificates. Keep in mind, though, most companies including Apple and the Walt Disney Co. (DIS), have stopped doing so.
Or you can go the stock gift card route. Stockpile offers gift cards for more than 1,000 stocks and 100 ETFs, and even lets investors buy fractional shares starting at $5. The value of the gift is fixed until the gift card is redeemed. Then its face value is converted into fractional shares of stock that fluctuate with the market.
If you already own stock and want to give some of your shares as a gift, you'll need to open a brokerage account for the recipient or, if the person is under age 18, a custodial account that names an adult, typically a parent, as custodian. To transfer shares, contact your brokerage and ask for a stock transfer form.
Set up the gift to keep on giving. To get the benefit of compounding, consider a dividend reinvestment plan, says Peter J. D'Arruda, president and founding principal of Capital Financial and Insurance in Apex, North Carolina. With a DRIP, the cash dividends are reinvested in additional shares. Most companies require that you own at least one share of stock before you can enroll in its DRIP plan.
You can buy shares of companies with dividend reinvestment plans at FirstShare.com. Minimum investment amounts and fees, which First Share lists, will vary by company.
D'Arruda likes this gift because it's educational."This way, they get a gift each month of more shares of stock, and the person who receives this gift sees the value of investing, compounding and time," he says.
Get the tax benefit from donating to charity. Thanks to this multiyear bull market, selling appreciated stocks and donating the proceeds to charity is not the most efficient form of giving, Hawkins says. Instead, it's more tax-efficient to donate appreciated securities directly to charity.
For example,let'ssay a retired couple in the 15 percent tax bracket for long-term capital gains decides to sell stock they originally purchased for $500 that has appreciated to $2,000. The couple would pay $225 in federal tax on the $1,500 gain that was realized from the sale, Hawkins says. "If they donate the rest of the money from the stock sale, they would receive a tax deduction of $1,775," he says. "Assuming they're in the 25 percent income tax bracket, their tax savings would be about $443."
Conversely, investors should avoid donating shares with a loss. For example, an investor is better off selling the shares for a $1,000 investment that is now valued at $750, realizing the loss and then giving the $750 in cash to charity, Hawkins says.
For investors who are 70.5 and older and must take required minimum distributions from their individual retirement accounts, another option is to donate the RMDs by making a qualified charitable distribution, which is a direct transfer of the funds to a qualified charity.
Copyright 2017 U.S. News & World Report