Taxes/Deductions on Contributing/Gifting Stock with NUA
I live in TX and I have NUA-containing company stock from an LSD that occurred ~13 months ago. In 2008, I wish to contribute some of this stock to a “50% Limit” charitable organization (total contributions in ’08 will be less than 20% of my AGI), and gift some to my 23 year-old daughter who works full time and makes $30k annually. My total gifts to my daughter in ’08 will be under $12k. Would you please confirm that the following four assumptions are true and then answer two questions at the end?
1) I will owe no federal tax on either the contribution or the gift.
2) I can deduct the full FMV of my ’08 contribution on my ’08 federal tax return.
3) My daughter will owe no tax on the stock received if there is no appreciation on the stock from the time of receipt to the time of ’08 sale.
4) If there is appreciation on the gift stock to my daughter, and she sells the stock within 12 months, she will owe STCG tax on the appreciation.
Question 1: RE #3 above, will my daughter have to report anything on her ’08 federal tax return and, if so, what? I believe her broker will send a 1099-B to the IRS and I don’t know how they will know this stock was a gift and non-taxable.
Question 2: RE #4 above, will my daughter need to report this stock sale on Part 1 of Schedule D … and should the “Cost” in 1e show the FMV at the time of receipt?
Thank you in advance for your help!
Permalink Submitted by Alan Spross on Fri, 2008-06-06 04:57
1) Right
2) Yes, provided you itemize deductions.
3) She will owe no tax due to receipt of the NUA shares. When she sells the shares she must report the gain on Sch D as long term gain. There could also be a loss if the stock is sold for a price below it’s cost basis, which is the cost per share at the time of the LSD.
4) No. Her holding period is your holding period, which is automatically long term for the NUA gains. Since the LSD is over a year ago, your holding period for any additional gains is also LT. She gets your holding period, so the total gain she would have is LT. A new holding period does not start when she receives the gifted shares.
Q1) She only reports if she sells shares in 08. LT gain would be reported on the LT portion of Sch D. Cost is your cost basis coming out of the plan. The IRS will not know this was a gift unless they inquire about the basis used, so you should provide her with some record of the cost basis from the plan and of your gift, just in case.
Q2) Part II of Sch D (Long Term) – see above. She would be paying the tax on the NUA gain plus any additional gains. No need to separate the two on her Sch D.
These are good shares to gift rather than having her inherit them because there is no step up in basis for NUA since NUA is considered IRD.
Permalink Submitted by Dan Gibbs on Fri, 2008-06-06 07:39
Thanks Alan. I have some additional questions regarding your statement that these are good shares to gift to my daughter rather than having her inherit them. The federal tax would be LTCG tax (no step up) either way, wouldn’t it? Is the gift vs. inheritance benefit you refer to because of possible subjection to, or increase in, estate tax liability due to the inherited “NUA” stock? Finally, does the IRD deduction help offset federal estate tax paid on NUA or is this deduction only applicable to IRAs?
Permalink Submitted by Alan Spross on Fri, 2008-06-06 19:27
You are correct that the tax due at current long term cap gain rates would be due on the NUA portion either way. By indicating these are good shares to gift, the advantages would be:
1) No benefit of a step up would be achieved by passing them as an inheritance, unlike typical equities.
2) Current LTCG rates are historically very low, so she might well pay a lower rate by selling now than waiting until those rates increased.
There is also an advantage of gifting the NUA shares vrs gifting non NUA shares since the non NUA shares WOULD get a step up, so those would be more beneficial to hold if you were gifting some and holding some.
The estate tax liability is the same for NUA assets, IRAs, or other taxable assets. But you raise a good point about the IRD deduction possibly offsetting to a large degree the income tax a beneficiary would pay, if donor was subject to federal estate tax. However, there is an adjustment for capital gain property to prevent the IRD deduction from covering MORE than the cap gain cost.
Permalink Submitted by BruceM on Tue, 2008-06-10 17:28
Alan
When you say that the NUA would not step up at death and would be IRD, do you mean when the beneficiary inheriting the NUA stock sells the stock at some later date, or is the NUA deemed LTCG income to the heir in the year of the owner’s death, even though the shares have not yet been sold?
BruceM
Permalink Submitted by Alan Spross on Tue, 2008-06-10 19:01
Bruce,
The beneficiary receiving NUA shares would not incur any tax until the shares were sold. Following is a typical example:
1) Owner receives shares worth $70 with a cost basis of $20 per share and NUA of $50
2) Owner passes when FMV of shares have increased to $90.
3) Beneficiary inherits basis of $20 and gets a step up of another $20 for the gain in excess of the FMV at distribution, but no step up for the NUA of $50. Beneficiary decides to sell shares after they increase to $100 per share 6 months after inheriting.
Beneficiary has a basis of $40 per share that results in a LT gain of $50 per share for the NUA and a ST gain of $10 per share for the gain after inheriting.
Permalink Submitted by BruceM on Tue, 2008-06-10 22:06
Alan
Got it, thanks.
And in your example, if the original shareholder’s (the decedent’s) estate paid estate tax, then in the year the shares are sold by the person who inherited them, that individual would be allowed to take a misc itemized deduction (not subject to the 2% limitation) that represents the amount of the estate tax due to the NUA only…
…correct?
BruceM
Permalink Submitted by Alan Spross on Tue, 2008-06-10 22:30
Correct.