You can gift a significant amount of stock tax-free, primarily utilizing two key provisions: the annual gift tax exclusion and the lifetime gift tax exemption.
As of 2023, you can gift up to $17,000 per person per year without incurring any gift tax or needing to file a gift tax return. If the value of the stock you wish to gift exceeds this annual exclusion amount, the excess value will begin to use up your lifetime gift tax exemption, which is $12.92 million as of 2023.
Understanding the Annual Gift Tax Exclusion
The annual gift tax exclusion allows you to give money or property, including stock, to as many individuals as you wish each year without using up any of your lifetime exemption or triggering gift tax.
- Per Recipient: This limit applies per recipient, meaning you can gift $17,000 to your child, another $17,000 to your grandchild, and another $17,000 to a friend, all in the same year, without any tax implications for you or the recipients.
- Spousal Gifting: If you are married, you and your spouse can combine your annual exclusions. For example, a married couple could jointly gift up to $34,000 (2 x $17,000) to one person in 2023 without it counting against their lifetime exemptions.
Example:
If you want to gift stock worth $17,000 to your daughter in 2023, this gift falls within the annual exclusion, and you will not owe gift tax or need to file a gift tax return.
Understanding the Lifetime Gift Tax Exemption
The lifetime gift tax exemption is the total amount you can give away during your lifetime (beyond the annual exclusion) or at your death before gift or estate taxes become due.
- How it Works: If you gift stock valued over the annual exclusion to someone, the amount exceeding the exclusion reduces your available lifetime exemption. For instance, if you gift stock worth $20,000 to an individual in 2023, the first $17,000 is covered by the annual exclusion. The remaining $3,000 ($20,000 - $17,000) will reduce your lifetime exemption from $12.92 million to $12.917 million.
- No Immediate Tax: It's important to understand that exceeding the annual exclusion does not immediately result in gift tax. Instead, it just draws down your lifetime exemption. Gift tax is typically only owed if you exceed your total lifetime exemption over the course of your life.
- Reporting Requirements: Gifts exceeding the annual exclusion require you to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if no tax is due. This form informs the IRS that you are using part of your lifetime exemption.
Key Gift Tax Limits (2023)
| Category | Limit (2023) | Notes |
|---|---|---|
| Annual Gift Tax Exclusion | $17,000 per person | Can be given to any number of individuals per year. |
| Lifetime Gift Tax Exemption | $12.92 million | Total amount you can gift or leave at death tax-free. |
Note: These amounts are for 2023 and are subject to change in future years.
Practical Insights for Gifting Stock
- Valuation: The value of the stock for gift tax purposes is its fair market value on the date the gift is made. For publicly traded stock, this is typically the average of the high and low trading prices on that day.
- Basis for Recipient: The recipient of gifted stock usually takes on your original cost basis (what you paid for it). This is important because it affects the capital gains tax they might owe if they later sell the stock.
- Documentation: Keep meticulous records of all stock gifts, including the date, number of shares, recipient, and the fair market value at the time of the gift. This is crucial for tax reporting and future planning.
- Consider "Gifting Down": If you have highly appreciated stock, gifting it to a lower-income individual (like an adult child) who might be in a lower capital gains tax bracket could be a beneficial strategy if they later sell the stock.
- Professional Advice: For large or complex stock gifts, or if you're approaching your lifetime exemption limit, consulting with a tax advisor or estate planning attorney is highly recommended. They can help you navigate the rules and optimize your giving strategy.
For more detailed information on gift taxes, you can refer to the IRS website.
