If Donor Pays Capital Gains Tax on Stock Given as Gift, a New Tax Basis Is Established
Q. I gave stock to my grandchildren several years ago. I paid the capital gains taxes on the transferred shares based on the difference between the price I paid for the stock and its value at the time of the gift. I told my grandchildren that their tax basis was the value that I declared for the purposes of paying the capital gains tax. Was I wrong?--W.R.D.
A. You are not wrong. Because you have already paid taxes on the stock’s appreciation up until the point of your gift, your grandchildren are not also liable for the gains. Their tax basis should be the stock’s value as of your date of gift--that is, the same value you declared when determining the amount of your capital gains tax.
For the record:
12:00 a.m. Oct. 26, 1997 YOUR MONEY MONEY TALK / CARLA LAZZARESCHI For the Record By CARLA LAZZARESCHI
Los Angeles Times Sunday October 26, 1997 Home Edition Business Part D Page 3 Financial Desk 5 inches; 157 words Type of Material: Column; Correction
Last week’s column on a grandfather’s gift of appreciated stock to his grandchildren contained erroneous advice. Donors may not make gifts of appreciated stock and pay the government the capital gains tax on that appreciation without first selling the shares.
Even though the government is cheated out of nothing and recipients receive a gift without accumulated tax liabilities, the system does not accommodate such maneuvers; there must be a transaction, stresses Los Angeles tax attorney Ken Feinfield of McKenna & Cuneo, before there can be a tax.
So, what can Grandpa do now, since he admitted that he already gave the shares and paid the tax? He can file for a refund.
Presuming that we’re talking about small values, the most important thing to remember is that although the rules have technically been broken, no one has been harmed. And the government is actually better off, because it has received its tax payment early. (Stockbrokers might disagree, because the required transaction would have to pass through a broker to meet the technical requirements of the law, but we’re presuming this is a small-time deal.)
What you did is certainly generous--but quite unorthodox. Why would someone be motivated to make such a gesture, beyond the obvious wish not to give a gift that brings with it a significant tax obligation? Our experts say one reason could be a donor’s wish to use capital loss carry-forward credits. Such a move would also make sense if the donor was in a significantly lower tax bracket than the recipient.
Q. In a recent column you said there is no mandatory distribution age with a Roth individual retirement account. I will turn 70 1/2 next year and will be required to take a mandatory distribution from my regular IRA. If I roll my IRA over into a Roth IRA, can I then postpone taking any distribution until the five-year holding period is over, or even longer? May I pay the required taxes with funds from other savings? The idea of leaving my full IRA invested without taking mandatory distributions is very appealing.--F.G.B.
A. You may roll your IRA over into a Roth IRA after Jan. 1, 1998, as long as your adjusted gross income is less than $100,000. You may then take distributions from your Roth IRA whenever you want--or never.
But the most important issue is why you would want to do this given that taxes on the amount rolled over must be paid within four years of the rollover.
Perhaps you are thinking that because the Roth IRA has no mandatory distribution requirements, you can avoid withdrawing your money. This is true, but you cannot escape paying taxes on it. You will face a smaller tax bite by making mandatory withdrawals from your regular IRA than you would if you transfer the account to a Roth IRA.
Our experts estimate that, given your age, your mandatory withdrawal would be about 4% of your IRA account’s balance. That is the amount on which you would have to pay taxes--significantly less than the 25% of your account balance on which you would face taxation if you roll your IRA over into a Roth. To answer your second question, you may pay the taxes on the transfer to the Roth IRA with whatever money you want. Still, why would you want to do this?
Q. I am a county employee who participates in a deferred compensation plan and the county pension plan. I want to open a Roth IRA next year. Am I eligible?--D.N.
A. You are eligible to make a $2,000 contribution to a Roth IRA or to a regular IRA with funds on which you have already paid taxes as long as you meet the income qualifications that were significantly liberalized in this year’s tax revision. If you are single, you may make a full $2,000 contribution if your adjusted gross income is less than $95,000. Although the precise amounts have yet to be set, in general, partial contributions are allowed for single filers with adjusted gross incomes of up to $110,000. Full contributions are allowed for couples filing joint tax returns whose adjusted gross incomes are less than $150,000. Partial contributions for joint filers are allowed for those with adjusted gross incomes of less than $160,000.
