How to Gift Stock to a College Student and Potentially Save on Capital Gains Taxes
Parents, grandparents, aunts, and uncles are looking for smart ways to help their college-aged children financially while also minimizing taxes. One strategy that is often overlooked is gifting appreciated stock. This is especially important when the student is no longer claimed as a dependent for tax purposes. When used appropriately, this approach can help reduce a family's overall tax burden while providing valuable financial support to a student. Here's how it works.
What Is Gifting Appreciated Stock?
Instead of selling investments that have increased in value and paying capital gains taxes yourself, you may be able to transfer those shares directly to your college student.
Once the stock is transferred, the student becomes the owner of the shares and can decide whether to hold or sell them. Depending on their income level, they may qualify for a much lower long-term capital gains tax rate than you would.
Why This Strategy Can Save Taxes
College students often have relatively low taxable incomes. Because long-term capital gains are taxed based on taxable income, a student may be able to sell appreciated investments while paying little, or possibly no, federal capital gains tax if they fall within the applicable income thresholds.
For families in higher tax brackets, this can create meaningful tax savings on capital gains compared to selling the stock themselves to give to the student.
Example
Imagine you purchased stock years ago for $5,000, and today it is worth $20,000. If you sell the shares yourself, you'll realize a $15,000 capital gain that may be subject to federal and state capital gains taxes.
Instead, you give shares to your college student. If the student has limited taxable income from part-time work or internships, they may qualify to pay significantly less in capital gains tax when they sell the shares.
The result? More of the investment value stays in the family instead of going towards taxes.
It’s best to confirm this strategy with your trusted tax advisor.
Important Rules to Know
While this strategy can be effective, there are several important considerations:
The Kiddie Tax: The Kiddie Tax rules may apply to certain students under age 24, particularly if they are full-time students and do not provide more than half of their own financial support. These rules can cause some investment income to be taxed at the parents' tax rate, reducing or eliminating the expected tax benefit.
Annual Gift Tax Exclusion: Gifts of stock generally qualify for the annual federal gift tax exclusion. Larger gifts may require filing a gift tax return, although most individuals will not owe gift tax because of the lifetime exemption. Confirm the current annual limits with your trusted tax advisor.
Financial Aid Impact: Assets owned by the student and investment income recognized from selling stock may affect eligibility for need-based financial aid. It's important to evaluate how this strategy fits within your family's broader financial plan.
State Taxes: State income tax rules vary and may impact the overall tax savings. Again, it’s always a good idea to check with a tax advisor first.
Because of these factors, this strategy should always be evaluated in the context of your family's complete financial picture.
Is This Right for Your Family?
Gifting appreciated stock can be an excellent way to:
Help pay for college expenses
Reduce potential capital gains taxes
Transfer wealth efficiently
Teach young adults about investing and financial responsibility
However, timing matters, and understanding the tax rules is essential to maximizing the benefits.
Let's Build a Tax-Smart Gifting Strategy
Tax-efficient gifting isn't just for the ultra-wealthy; it's a valuable planning tool for many families. Whether you're helping pay for college, transferring wealth to the next generation, or simply looking for ways to reduce taxes, a well-designed gifting strategy can make a meaningful difference.
The financial planners at Lightcap Financial Group can help you determine whether gifting appreciated stock fits your overall financial and tax plan. We'll work alongside your tax professional to help implement strategies that align with your goals and avoid unintended consequences.
Contact Lightcap Financial Group today to discuss this strategy and learn about other tax-saving gifting opportunities that may benefit your family. Thoughtful planning today can help preserve more of your wealth for the people you care about most.
This article is for educational purposes only and should not be considered tax or legal advice. Tax laws are subject to change, and individual circumstances vary. Consult with your financial advisor and qualified tax professional before implementing any tax or gifting strategy.
This commentary reflects the personal opinions, viewpoints and analyses of the Lightcap Financial Group, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Lightcap Financial Group, LLC or performance returns of any Lightcap Financial Group, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Lightcap Financial Group, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.