Are you planning to make financial gifts to family members or other loved ones? If you also want to reduce the tax hit from appreciated investments, consider gifting stock instead of cash. With the right approach, you may be able to eliminate federal tax on the appreciation — or at least reduce it significantly.
Leveraging Lower Capital Gains Rates
Most investors pay a 15% tax rate on long-term capital gains. For higher-income taxpayers, that rate increases to 20%, and those whose modified adjusted gross income (MAGI) exceeds certain thresholds may owe an additional 3.8% net investment income tax (NIIT).
But there’s an opportunity:
Taxpayers whose ordinary income falls in the 10% or 12% income tax brackets qualify for the 0% long-term capital gains rate on gains that fit within those thresholds.
If you have family members who fall into this 0% bracket, transferring appreciated assets to them can create substantial tax savings. The recipient can sell the assets and, in many cases, pay little to no federal tax on the gain.
Case Study: How the Strategy Works
Ed and Nancy face a combined 23.8% long-term capital gains rate (20% top bracket + 3.8% NIIT). Instead of selling appreciated stock themselves, they transfer it to their adult granddaughter, Emma.
Emma recently graduated, earns enough to leave her with $30,000 in taxable income, and qualifies for the 0% capital gains bracket. In 2025, the 0% bracket for single filers extends to $48,350.
When Emma sells the gifted stock, she recognizes $20,000 in long-term capital gains. Here’s how the tax breaks down:
- $18,350 falls within the 0% bracket
- The remaining $1,650 is taxed at 12%
- Emma owes only $198 in federal tax
If Ed and Nancy had sold the stock themselves, they would have owed $4,760 — making the income-shifting strategy highly effective.
What Else You Should Consider
The Kiddie Tax Rules
If the gift recipient will be under age 24 on December 31, make sure the kiddie tax won’t apply, as it can limit the benefit of this strategy.
Potential Gift and GST Tax Implications
Transferring appreciated assets may affect gift tax or generation-skipping transfer (GST) tax. Proper planning can ensure you maximize the strategy without triggering unintended tax consequences.
We Can Help You Maximize Tax Savings
If you’re considering gifts or want to explore ways to reduce tax on your investments, we can walk you through the rules and opportunities. Our team can help you identify strategies tailored to your financial goals and family circumstances.
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