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Posted by Vigo on February 5, 2007, 1:51 am
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> Unfortunately the article doesn't really clearly explain how
> the 0% rate applies. The gist of the article appears to be
> that a person with significant non-capital gains income can
> indirectly take advantage of the 0% rate by transferring (by
> gift) appreciated property to persons who will have little
> or no taxable income of any sort for '08, e.g., one's
> college-age or younger children. By doing so, and depending
> on your gift-tax exposure, the child would sell some of the
> appreciated property in '08 and take advantage of the 0%
> rate, effectively permitting the parent to transfer a
> greater sum to the child than the parent could have done if
> they had transferred money that had already been taxed.
>
> In other words, if you're going to have to pay for your
> child's education anyway, instead of paying the tuition
> directly using money that you've already paid, say, a 30%
> income tax on, transfer appreciated property with a value of
> $12k or less to the child (thereby avoiding gift tax on the
> value of the property) and have the child sell the property
> and use the proceeds to pay the tuition.
>
> Since most parents are unlikely to get much benefit out of
> paying tuition costs directly because of the phase-out of
> the education credits, in the scenario described, it would
> make more sense to transfer the appreciated property to the
> child and let them pay the tuition themselves. Provided
> that the child's total taxable income, including any gain
> from selling the appreciated property, was less than about
> $33,900 for '08, the gain on sale of the property would be
> taxed at the 0% rate. Of course, this only makes sense if
> the property is substantially appreciated, since the basis
> in the property is the parent's cost as measured in
> after-tax dollars invested in the property - thus, the basis
> represents money already taxed.
>
> For example, suppose Parents, who file joint, will have
> $90,000 of wage income for '08, and will therefore not
> qualify for the 0% rate. Suppose also that they intend to
> sell stock with a value of $12,000 to pay for child's
> tuition in '08, and that child has her own taxable income of
> $10,000 from wages. If the basis in the stock is $1,000,
> then gain from the sale will be $11,000. If Parents sell
> the stock, they will pay tax of $1,650 on the sale, leaving
> them with net cash of $10,350 ($12,000 proceeds, less $1,650
> tax) to spend on child's tuition. On the other hand, if
> Parents make a gift of the stock to child, and child sells
> the stock for $12k, then child will also recognize $11k of
> gain (basis transfers in this case), will have total taxable
> income of $21,000, thereby qualifying for the 0% rate on all
> of the gain, and will pay a tax of $0. As a result, child
> will have net cash of $12,000 ($12,000 proceeds, less $0
> tax) to pay her own tuition. In addition, child is likely
> to qualify for one of the education credits, resulting in
> even less tax due on her other wage income. Assuming that
> child qualifies for a $1,000 education credit as a result of
> paying her own tuition (which should be fully useable with
> other taxable wage income of $10,000), the net effect of
> Parents transferring the stock to child instead of selling
> it and paying the tuition themselves could be as great as
> $2,650; i.e., child receives $2,650 more in economic benefit
> - money to spend - than if Parents had sold the stock
> themselves. That's a nice present from Uncle Sugar.
>
> In particular, it should be noted (the article you refer to
> does not highlight this point) that the amount of capital
> gain that qualifies for the 0% rate is the amount of gain
> you have that, as a general rule of thumb, does not exceed
> $33,900 minus the amount of your non-long-term-capital gain
> income ($67,800 minus non-cap gain income if filing
> jointly).
>
> In other words, if your non-long-term-capital gain income
> exceeds the threshhold at which the 25% rate bracket applies
> (approximately $33,900 or $66,800 for single/joint,
> respectively, for '08), then none of your capital gains will
> qualify for the 0% rate and will, instead, be taxed at the
> by-now-normal 15% rate.
Wouldn't the fact that the child used the money from the
sale of the gifted stock to pay his tuition cause him to
lose his eligibility as a dependent? To claim the child as a
dependent, the parent would need to pay at least half of his
support. The parent is probably not paying much of anything
to support the child away at college other than his tuition
and room and board. If the child pays his own tuition,
wouldn't this jeopardize his standing as a dependent? The
money saved by having the child sell the appreciated stock
with zero capital gain might be outweighed by the loss of
the dependent deduction.
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