Investor gets no tax benefit of stock gift to son

I have a question pertaining to a stock
giveaway. If were to give stock to my son, could I take a tax loss on my 1040
form?

N.N.

I assume from your question that your stock would generate a loss for you if you sold it rather than giving it away. If this is the case, you and your son are about to find yourselves in a very interesting tax situation.

First you must figure out your basis in the stock. The basis is typically your cost and, in the case of stock, you may add to the cost any commission you paid when you bought the stock. If you were to sell the stock yourself, you would compare the amount you received in the sale to the basis to determine whether you have a taxable gain or a loss on the sale.

When a gift is made of stock or any other property, the donor's basis carries over to the recipient.

In other words, this means that whatever you paid for the stock (including commissions) will be your son's basis when you make a gift of the stock. You recognize no gain or loss from the transaction. In fact you don't report this on your income tax return at all. (You may, however, be subject to a gift tax if the basis of the stock exceeds $10,000.)

For example, if you paid a total of $5,000 for the stock, the stock is now worth $3,000, and you give the stock to your son, you recognize no loss on the transfer of ownership. Your son, when he sells the stock, faces a surprisingly complicated situation.

For purposes of record-keeping, your son's basis in the stock is $5,000, the same as yours. However, the plot thickens when he sells the stock.

If he sells the stock for more than $5,000, his basis is $5,000, and he pays tax on the difference between the sales price of the stock and the basis. So if he sells the stock for $6,000, he will pay tax on $6,000-$5,000, or $1,000.

If he sells the stock for less than $3,000 (the value of the stock at the time it was transferred to him), his basis is the fair market value at the time the stock was transferred, or the $3,000. So if he sells the stock for $2,500, he will have a tax loss of $3,000-$2,500, or $500.

If he sells the stock for something in between your basis ($5,000) and the fair market value at the time of the transfer ($3,000), for example, if he sells the stock for $4,000, guess what? There is no gain or loss on the sale.

Also, please note that if your son sells the stock for a taxable gain or loss, he will report the sale on his Schedule D, using your original purchase date as his date of purchase. The amount he will show as the cost of the stock will be either your basis or the fair market value at the time of transfer, depending on whether he is reporting a gain or a loss.

I received a check recently from a life insurance policy held by a
relative. I was the sole beneficiary and the sum is rather substantial. I've
been told I don't have to include this on my tax return, is that correct?

G.W., Indianapolis

Right you are. When you receive a lump sum of life insurance proceeds, the only time the money is taxed is if the amount you receive is more than the face value of the life insurance policy.

If, instead, you were to receive the life insurance proceeds in installments, part of each payment would be taxable. You would determine the taxable part by dividing the total face value of the life insurance policy by the number of payments you are to receive. The result is the non-taxable portion of each payment. Anything you receive in excess of this amount is taxable.


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