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Appreciated Assets: The Gift That Keeps on Giving

Have you ever wondered whether you should gift cash or an appreciated asset to your loved ones or to a charitable organization you admire? In this article, you will discover that using the latter approach would benefit you more with consideration of tax. An appreciated asset may be in the form of stock, bond, currency, or real estate. What is An Appreciated Asset? In general, appreciation refers to an increase in an asset’s value over time. This may occur due to factors such as inflation, change in demand and supply, or sometimes a composition of both factors. Simply put, asset appreciation refers to an increase in asset value, while asset depreciation refers to a decrease in the asset’s value.  Suppose you bought 1,500 shares at $60 a couple of years back with a total worth of $90,000. Assuming the shares are currently $120 per unit, the current value would be $180,000. Based on this, the stock has appreciated by $90,000, and is subject to capital gains tax. Assuming you desire to gift this appreciated asset to four of your children or any of your choice, what would be the best approach to minimize taxes? Best Method to Gift Your Appreciated Asset Should you decide to sell the stock and gift the cash to your children, the appreciation value would be subject to capital gains tax. There is a method you can use to remove the appreciation from assets and avoid paying capital gains tax. This allows you to keep the assets’ current economic value while removing the appreciation from your estate. You can adopt a different approach to pass on assets increasing in value to subsequent generations or a charitable organization of your choice.  Rather than gifting the cash value after selling the shares, you can gift each of your four children $45,000 worth of shares. There will be no tax due from you, but if the children sell the stock, they will be responsible for paying tax on the capital gains at their rate. If they are in a lower tax bracket than the one you are in, you might want to consider doing this. Keep in mind that if you provide an individual with more than $16,000 in a calendar year, you are required by the IRS to fill out Form 709. Couples can also increase donations; for example, a married couple could contribute one individual $16,000 annually, for a combined total of $32,000. Currently, there is no tax responsibility related to these gifts. Form 709 of the Internal Revenue Service is a technique to keep tabs on gifts worth more than $16,000. However, when a person dies, any gifts that were made in excess are brought back in, and there is a possibility that estate taxes will be owed. Donating assets that have increased in value to a charitable organization operates similarly, but there is no restriction on what you can donate. You are eligible to obtain a tax deduction, and there is no need to fill out an IRS Form 709 on your end. The charitable organization can sell the appreciated asset without incurring liability such as capital gains tax. What exactly is the tax on capital gains? If you are the owner of an asset that has increased in value over time and decide to sell it, you will be required to pay tax on the difference between what you paid for the asset and what you made from selling it. This is referred to as a “capital gains tax.” Your income tax bracket at the time of sale and the amount of time you have been the property owner are the primary factors determining your capital gains tax rate. Benefits To the Tax Payer When donating appreciated assets to a qualifying charity, such as stocks, the donor can generally claim a federal income tax deduction (subject to IRS limits) equivalent to the total fair market value of the securities at the time of the donation. Because the valued assets are being donated to a qualifying charity, the donor will not realize any capital gains at the time of the gift, potentially avoiding capital gains taxes on the asset’s appreciation. The federal rate might be as high as 23.8 percent, which can drastically reduce charitable contributions. Donors can give more since the long-term capital gains tax is eliminated because they are not responsible for paying the taxes on the asset’s sale. Furthermore, a tax-exempt charity will not have to pay capital gains tax on the stocks donated. This circumstance benefits everyone involved. Before making a decision, it is vital that you consult your tax planner on the best approach.

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