How to Figure Tax Basis for a Gift of Split Shares
QUESTION: I am planning on giving my son the extra stock I received as a result of a split on some shares I own. What will his tax basis in these shares be? Is it my original cost of the shares or their market price at the time of the split?--A. S.
ANSWER: Neither, say the tax advisers we consulted. Your son’s tax basis in these “split” shares--in effect, his “cost” for income tax purposes--would be half the amount you paid for the original shares. The only exception to this would occur if your son sold these shares at a loss. In this instance, the law requires the seller to value the shares at their fair market value at the time the gift was made, if that amount is less than the donor’s basis.
Here’s how it would work. Let’s say that you bought 100 shares of stock for $15 each and that the shares split two for one a few years later, giving you a total of 200 shares. Except in the instance alluded to above, your son’s tax basis for the 100 “split” shares you give him would be $7.50 a share. So, if your son later sells his 100 shares for $10 each, his taxable gain would be figured by deducting the $7.50 basis from the sales price and multiplying it by the number of shares. In our example, his taxable gain would be $250.
However, let’s say the stock price of the split shares plummets after you make your gift, and your son eventually sells the shares for $6 each. If the fair market value of the stock at the time the gift was made was $7 per share, your son’s stock would have a loss of $100--$1 for each share sold.
The theory behind this method of valuing depreciated stock, say our tax advisers, is to prevent individuals from giving away potential tax writeoffs to those who might need them more than the donor. Furthermore, the government recognizes that the recipient never really had a true loss on these shares anyway, since they were a gift.
Q: In a recent column about redeeming Series E U.S. savings bonds that were originally issued in the 1940s, you mentioned that the bonds were 40-year instruments. But I checked my bonds and they say the maturity is “10 years from the issue date hereof” or “9 years and 8 months from the issue date hereof.” I’m confused and would greatly appreciate a clarification.--L. R.
A: No wonder you’re confused. Your bonds do clearly give their maturity dates as you describe. However, all Series E bonds issued through 1965 were given three 10-year extensions by the Treasury Department, a savings bond division spokesman explains. So, for these bonds, full maturity is up to 40 years from issuance, or 30 years beyond what the bond itself states. Bonds issued since December, 1965, have received two 10-year extensions and may yet be given a third. By the way, since the late 1960s, the government has not printed a maturity date on bonds, precisely to avoid the potential for this confusion!
Q: I purchased a rental 10 years ago for $55,000 and am now considering selling it for that same price to my son. However, the fair market value of the house is about $150,000. After the sale is completed, could my son apply for a home equity loan of $50,000 and give me that money so I can escape taxation on my gains?--J. M. L.
A: You’ve suggested a clever ruse to escape taxation, but the Internal Revenue Service is at least several steps ahead of you.
Perhaps the largest single flaw in your scheme is that it relies on what the IRS calls a “bargain sale.” If you enter into such a deal, you will have to follow a set of complicated IRS rules governing such transactions. As far as the IRS is concerned, a bargain sale is any transfer of property for less than full market value. The IRS considers such transactions part sale and part gift, and they leave you liable for taxation both as a seller and donor.
You would be wise to consult a tax attorney or accountant for professional advice.
Q: Last year, I left my job to start my own business. At my previous job, I was enrolled in a defined benefit pension plan and was fully vested by the time I left. What will my tax obligations and penalty charges be if I want to take my accumulated pension as a lump-sum disbursement? I have gotten two different answers from two different accountants and am looking to resolve this.--J. B.
A: Your question is more complicated than it would seem on the surface, and you haven’t given us the key piece of information--your age--that we need to give you a precise answer. You really must talk to a tax attorney or accountant who knows pension plans.
If you are under age 59 1/2, your distribution would be fully taxable under most circumstances. Furthermore, you will be hit with a 10% penalty charge for early withdrawal of your retirement funds. There can also be a 15% penalty on amounts distributed in one calendar year in excess of $150,000, regardless of the recipient’s age.
If you are over age 59 1/2, you will avoid the 10% penalty. Furthermore, if you turned 50 by Jan. 1, 1986, your tax obligation on the disbursement can be calculated either at your highest applicable tax rate or based on a special five- or 10-year income averaging, which usually permits a lower tax rate to be used. Internal Revenue Service Form 4972 has a work sheet for calculating the special income averaging.
You should also note that you can avoid taxation on the disbursement entirely if you roll over the funds into a qualified individual retirement account within 60 days of cashing out of the plan.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
