AskDong

Baby P wrote:

Dong, how do you feel about gifting shares of stock to family? I hear it’s one
oft-used tax-shelter for those in the know.

BP

I’m a big fan of gifting shares in general, but I’m not sure if I’m in the know.  Gifting shares are not the big tax shelter some might think it to be.  Not that there are defininite tax advantages to gifting shares, but it you do if it’s all on the up and up (as it should be) it’s not a gigantic loophole to be exploited

When it comes to gifts, the first thing is understanding the annual exemption, and lifetime estate exemption. Everyone is allowed to give anyone else $12,000 (up form 10,000) free of of any special filings. After $12,000 you need to make gift tax filing, then it starts counting against estate tax exclusion. Taxes still don’t need to paid until the total gifts exceed the exclusion amount (which is $1,000,000).  [Correction, originally stated ast $2,000,000 and shifting - that's the Estate Tax exemption] There’s often confusion about whom the gift tax applies to.  It’s owed by the person making the the gift, not the receiver of the gift. So if for example you were to give your sister, $11,000 of MSFT that you purchased for $5,000, you would be under the exemption amount. No taxes would be due. Anything over 12,000 would then start chipping away at your estate exclusion. For this reason, it’s often advisable to start giving often and early but under the annual amount.

However your sister’s cost basis would still be $5,000, and if she were to sell the shares would have to pay taxes on the gain of $6,000. She also keeps your holding period. The clock on long term gains does not reset. Assuming that you and your sister were in the same tax bracket, no advantage would be had. However if she is in a lower tax bracket then in net the tow of you would save on taxes. Another thing to note is that you cannot apply the same logic to depreciated property. In the example above, let’s say the shares of MSFT were purchased for $11,000 and now are worth only $5,000. You can’t use a gift to transfer a tax loss to your sister. She wouldn’t be able to sell the shares of MSFT for $5,000 and claim a $6,000 loss. Her basis would be the lower of the value at the time of gift or the original basis if she’s selling for loss. If she sold between $5,000 (the value at gifting) and the $11,000 (the original basis), there would be no gain for tax purposes. At any value greater than $11,000 and she would have a taxable gain based on the original basis, $11,000. If gift taxes are paid then those taxes can be used to reduce the cost basis.

Inheritances are treated differently. An inheritance has something called “step-up” basis. The basis is set at the the time of death. For example if you were to inherit a house that is worth $1,000,000 but was purchased many years agos for $10,000, your basis is $1,000,000 rather than $10,000. This clearly makes a huge difference. Gifts and inheritances are highly related. As a result people who have “alot” really do need to have a carefully crafted plan of action to minimize both taxes and other complications for their loved ones. Gift taxes are also more complicated than I’ve laid out here. There are number of exemptions such as the unlimited exemption between a married couple. Gifts made directly to pay for medical and educational services are also exempt, the Kiddie Tax, etc.

Disclaimer:  I’m not a financial professional.  This is merely answer based on what little I know and should not be construed as financial advice.   It’s commentary more than anything else.

Corrections: The gift tax exemption is $1,000,000 not $2,000,000 as originally stated.  Thanks to savingforwealth for the correction.  I assumed that gift tax exemption would follow the estate tax exemption as they are closely linked.  I thought wrong.

I hate spam.  I was doing ok without any spam filter for comment verification.   I got a spam or two every day. Very manageable.   However beginning this past saturday, I’ve gotten alot more, about 30 each day.  That’s when I installed Peter’s Anti-Spam Image.   At first I just turned it on just for comments, but this morning I got trackback spam.  So I just turned in on for Trackbacks and Pings.   I’m dissapointed that I had to this because, I like trackbacks.  They are a great feature of the blogging community.   Spammers suck!

I’ve made reservations at Caneel Bay though not without protest. I’m a bit suspicious of the vote. I suspect ballot stuffing by my girlfriend. However, I am a man of word and will abide by my promise. I know you might be thinking that it looks like a tie between Caneel and the Westin, and it is. However, I got nervous at 4pm when Caneel had a two vote lead. I have been checking rates the last couple days, I knew I had potentially a small window of opportunity to lock in the better rate I was finding at that moment. I found a better rate than the one I listed last week. I believe a cheaper room somehow opened up. Most of the online travel agency only showed the more expensive oceanfront view, or beachfront view rooms. I was lucky enough to find a courtside view room on Travelocity. I called the hotel directly, and they only had the $575 on up rooms. I don’t really care about the view, at least not enough to pay $100 for it. As a result I got 3 nights at Caneel for $395 a night before tax. So it should be about $1400 total after tax.

The vote surprised me even if there was some vote tampering, I thought the Eco-Tents were going to get much more support. Earlier in the week the Tents were in the lead, and Caneel was dead last with one vote from my girlfriend.

I’ve been using TreasuryDirect for a little for over 3 years. For those who aren’t familiar with it, it’s the Treasury Department direct online service. Instead of going through a broker, or a bank, you can buy directly from the Government. For instance on E*Trade, you’re charged $40 per Treasury transaction. Ameritrade is $25, and Fidelity is $19.95. These fees are much higher than brokerage costs for stocks which typically hover at around $10 per trade at most online brokerages.

Even though, I’ve had my treasurydirect account for over 3 years, I haven’t done all that much with it.  I got some i-bonds which are basically the inflation adjusted equivalent to a savings bond – not terribly exciting.  I keep telling myself to use the account more, and was reminded once again by Sun’s post on emergency funds. Treasury Bills and Notes typically have rates that are competitive with most CDs (if not better), and are exempt from state and local taxes as well.  He has other great articles that go into much more detail about investing in Treasury securities as well.

By buying treasury bills, notes, or bonds through the treasury auctions you face a certain amount price uncertainty.  When you participate in the treasury auction via treasurydirect or most brokerages for that matter you go in as a price taker. Whatever price the auction clears at  - you get – though generally speaking there shouldn’t be big suprises.  By participating in the auctions, you can expect to beat most CDs.  Treasury Bills come in 4, 13, and 26 week terms, and there’s an auction weekly.  Notes come in 2, 3, 5, and 10 year terms.  TIPS(Treasury Inflation-Protected Securities) are issued in 5,10 and 20 year terms which allow you to hedge for inflation.  The principal amount in a TIP is adjusted for inflation and interest payments are based on that adjusted principal rather than the original nominal principal.  There is only one 30 year bond, fondly known as the “Long Bond” in fixed income circles (at least back when I used to know a fixed income broker or two).  I don’t know why the different lengths for these securities have different names at least when it comes to bonds and notes.  Notes and Bond both have coupons which are periodic interest payments.  Given your access to all these different types of securities, TreasuryDirect is a perfect place to invest instead in place of saving accounts and CDs. Careful management of treasury bills should yield superior returns in comparison to a savings account without trading off too much liquidity. Notes are a perfect alternative to CDs.  Transactions costs at brokerage could take a big bite out of the return if you cycle through alot shorter term Treasury Bills.   Good thing Treasurydirect is free. 

The one complaint I have is the Zero-Percent C of I securities that TreasuryDirect forces you to hold if want to keep a balance from which to fund your transactions. These “securities” pay no interest which actually isn’t the crux of my complaint. I don’t like the long name and the rather confusing nature to what is essentially cash holdings. On the most part there isn’t much of a need to have a balance in Zero-Percent C of I securities as transactions are easily funded via a linked account. The mature value of a security can then be funneled back to the linked account rather into the ZPCI instrument as well. The only real reason I see for keeping money in the Zero-Percent C of I is too quickly make transactions when funding the account would otherwise take too long.  I wouldn’t really know since I haven’t done so.

I wrote a few months back about CFL (compact fluorescent lighting) lighting which has really taken off in the last couple months to my pleasure. Better for your wallet and better for the environment.  A win win situation.  The other day, Andrew Leonard at Salon has post that spoke indirectly to what should someday become the next best thing, LED lights.  Apparently we can thank Shuji Nakamura for bringing us today’s new breed of LEDs for the masses. Besides alarm clocks, the place we most commonly encounter LED lights are traffic lights.  LED lights are ideally suited for traffic lights since they both last longer and are made up of hundred individual diodes.  Diodes tend to wear slowly instead of going out suddenly. But more importantly given a LED light is made up of hundreds of individual diodes, it’s improbable enough diodes would fail to cause a light failure. Less light failures means less accidents caused by a malfuctionion traffic lights.

LED lights use even less energy than CFL bulbs. T hey also last longer to boot.  Productdose does nice comparison of the different lights including a useful excel statsheet. Of course the biggest drawback is that LED lights are they are very expensive. The cheapest I’ve been able to come across for a LED replacement is $14.99.  Given that a CFL bulb costs only about $1.5, it’s hard to justify the tenfold price difference even though you’re better off in the long run.

In due time the price point for LED lights should come down as it does with all new technologies. I am, however, very interested in seeing how LED lights operate at home. I’m going to do a little more research and shopping around and purchase my very own LED bulb to replace any remaining incandescent bulb I might have.  I’ll review my LED experience as soon as I receive my first bulb.