Gifting stock to kids to pay for college - how to

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fogalog
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Gifting stock to kids to pay for college - how to

Post by fogalog »

My eldest is likely going to college next year, my youngest 2 years later. We will be paying. For various reasons, we did not set up a 529 plan and my intention is to pay for college from our Vanguard taxable account. I am trying to work out the most tax efficient way to do that.

My kids both have Vanguard accounts that I set up for them last year and neither have any significant earned income. We have enough VTSAX that were acquired 10+ years ago that have appreciated significantly to fund their college.

So I was wondering if the best option might be to transfer some of this already appreciated stock as a gift to each of them: $30k each, at today's FMV, but transferring older shares (using SpecID). Since neither has any earned income, them selling this appreciated stock will yield a lower tax burden than if I were to sell and give them the cash. I could do this now and then again in January.

A few questions:
  • is this possible within Vanguard (ie selecting older stock to transfer)?
  • is this the most tax-efficient way to achieve what we wish to achieve?
  • is there a different way I should be thinking about this?
  • edited to add: because they are my kids, does the $15k gift tax limit apply here at all - ie can i transfer the whole amount in one go?
We reside in California in case that matters.

Thanks in advance.
Last edited by fogalog on Fri Nov 26, 2021 11:17 am, edited 1 time in total.
livesoft
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Re: Gifting stock to kids to pay for college - how to

Post by livesoft »

Yes, you can specify which shares that are being gifted.

The most tax efficient way is to die and let them inherit all this without paying any taxes. But gifting shares is tax efficient. We did this.
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stan1
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Re: Gifting stock to kids to pay for college - how to

Post by stan1 »

Make sure you are making any charitable contributions through donation of appreciated securities as well. Can do it directly or easiest way to do it is probably through a Donor Advised Fund. Remember all money is green. Use all of your assets and income to pay for the college expenses in the most tax efficient way possible.
Last edited by stan1 on Fri Nov 26, 2021 11:39 am, edited 1 time in total.
Topic Author
fogalog
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Re: Gifting stock to kids to pay for college - how to

Post by fogalog »

livesoft wrote: Fri Nov 26, 2021 11:15 am Yes, you can specify which shares that are being gifted.

The most tax efficient way is to die and let them inherit all this without paying any taxes. But gifting shares is tax efficient. We did this.
Thanks for confirming... and making me laugh.

I edited my post but you were too fast: does the $15k limit apply in this circumstance?
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Watty
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Re: Gifting stock to kids to pay for college - how to

Post by Watty »

You may run into problems with the "kiddie tax" so be sure to understand how that works.

https://www.schwab.com/resource-center/ ... kiddie-tax
livesoft
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Re: Gifting stock to kids to pay for college - how to

Post by livesoft »

fogalog wrote: Fri Nov 26, 2021 11:39 amI edited my post but you were too fast: does the $15k limit apply in this circumstance?
There is no $15K limit in the sense that one can gift all they want legally. One would have to file a gift tax return showing they owed no gift taxes on the gift. But if you have a spouse (presumably since you used the pronoun "we"), then you can gift $15K and your spouse can gift $15K and not have to file gift tax returns. The IRS has a publication about all this, so reading that publication will give you knowledge and the power that comes with that knowledge.
Last edited by livesoft on Fri Nov 26, 2021 11:45 am, edited 1 time in total.
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Matahari
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Re: Gifting stock to kids to pay for college - how to

Post by Matahari »

OP, as your children are younger than 24, they will be subject to the "kiddie tax" rules for any Unearned Income (i.e., non-W-2 income) they have. The first $2,200 is taxed at their rate, the remainder at the parents' tax rate. That is, unless they are considered "self-supporting" under IRS support tests. Kiddie tax was something we dealt with for years until our child became self-supporting because of having enough W-2 income one year before turning 24.

So, while you may save a few dollars, it's not necessarily as big a tax saving as you might imagine.

https://www.irs.gov/taxtopics/tc553

Edited: Watty beat me to it!
privateer79
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Re: Gifting stock to kids to pay for college - how to

Post by privateer79 »

Watty wrote: Fri Nov 26, 2021 11:40 am You may run into problems with the "kiddie tax" so be sure to understand how that works.

https://www.schwab.com/resource-center/ ... kiddie-tax
right... essentially these days the kids can claim ~2200$ in gains without paying tax, but then it goes to parents rates.... so maybe the moral of the story is to start early and go small. (we're doing this with our elementary schoolers and using the funds to pay for private schooling, and 529 contributions which yield them additional tax credits in our state)
afan
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Re: Gifting stock to kids to pay for college - how to

Post by afan »

If they will be applying for financial aid, the assets you give them could compromise the offers. May want to discuss, or ask question here before making the gifts.
Do you need to sell your low-basis funds to cover the costs?
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increment
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Re: Gifting stock to kids to pay for college - how to

Post by increment »

fogalog wrote: Fri Nov 26, 2021 11:09 am edited to add: because they are my kids, does the $15k gift tax limit apply here at all - ie can i transfer the whole amount in one go?
There is no exception (to the requirement to file, which is not necessarily a requirement to pay tax) for gifts to your children. The only exception is for gifts to your spouse.

[edited to fixed grammar]
Last edited by increment on Fri Nov 26, 2021 8:35 pm, edited 1 time in total.
RetiredCSProf
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Re: Gifting stock to kids to pay for college - how to

Post by RetiredCSProf »

You can pay for college tuition / fees and medical expenses directly, without having it count against the annual gift exclusion, which increases to $16K in 2022.
Topic Author
fogalog
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Re: Gifting stock to kids to pay for college - how to

Post by fogalog »

Thanks to everyone for the advice. Looks like my best option would have been to transfer a small amount every year... but since I cannot go back in time, I will transfer some now and some in Jan and have them sell some up to the kiddie tax limit for both. It will be a good start.

Thanks again.
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Matahari
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Re: Gifting stock to kids to pay for college - how to

Post by Matahari »

Here's an article by Michael Kitces that may be useful to you.
Keep in mind that it's several years old, so you'll need to update relevant tax information because there have been changes:

https://www.kitces.com/blog/liquidate-a ... iddie-tax/
KeepingEyesOpen
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Re: Gifting stock to kids to pay for college - how to

Post by KeepingEyesOpen »

increment wrote: Fri Nov 26, 2021 12:09 pm
fogalog wrote: Fri Nov 26, 2021 11:09 am edited to add: because they are my kids, does the $15k gift tax limit apply here at all - ie can i transfer the whole amount in one go?
There is no exception (to the requirement to file, which is not necessarily a requirement to pay tax) for gifts to your children. The only exception is for gifts to your spouse.

[edited to fixed grammar]
My understanding of the gift rules is different. My understanding is this: a gift to any individual that does not exceed the exclusion amount (2021 amount is $15,000 for individual donor, $30,000 for married couple) does not require any reporting or filing a tax return. An amount over that requires reporting on form 709, but will not necessarily result in a tax liability.

In a related note, there is an educational exclusion. If you want to provide an amount exceeding the $15,000 gift exclusion amount, there is an educational exclusion for payments made directly to a qualifying educational organization for tuition (not books, room & board, etc). Be careful, though - tuition payments made on a child's behalf could, in some circumstances, be included in the child's "income" for the purposes of future student aid determination. I'm not sure if that applies to payments made by parents (as opposed to grandparents or other 3rd party).
Makefile
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Re: Gifting stock to kids to pay for college - how to

Post by Makefile »

fogalog wrote: Sun Nov 28, 2021 10:12 am Thanks to everyone for the advice. Looks like my best option would have been to transfer a small amount every year... but since I cannot go back in time, I will transfer some now and some in Jan and have them sell some up to the kiddie tax limit for both. It will be a good start.

Thanks again.
Don't forget that the dividends count toward that limit too.
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