Dealing with large long term stock gains

[Like2Plan]

I had the same thought. Then the question is how to have her transfer the money back to us. The current gift limit is 15K which would work. We could gift her the stock and she could gift us the proceeds. Does doing that raise any red flags with the IRS? It's not hard to see the reason behind that if anyone is paying attention.

Of course, we could gift her the stock, have her sell it, and then have her use that money to pay for stuff that we would normally pay for so that we "get" the money indirectly.


I sold our one loser last year for just that reason. We don't own any other losers thankfully.

We could also donate shares, but I'd prefer to save that option for 401k and t-IRA withdrawals since those are taxed as ordinary income.

I agree with Moneybags that it would be a No-Go as far as the IRS is concerned. Here is the underlying explanation on Step Transaction Doctrine: https://www.pmstax.com/acqbasic/stepTran.shtml

Your daughter using the gift to pay stuff she is responsible for would probably be okay. (But, if she was paying for stuff you are responsible for probably wouldn't)

You probably already know this, but I thought I would add some additional qualifications for making qualified charitable distributions (QCDs) using a traditional IRA. (The pretax 401k funds can not be used for QCD's but can be used for QCDs after rollover)
1.You must be 70.5
2. If you are over 72.5 (and must take RMDs)--QCDs must be the first distribution.
3. QCDs must be a direct transfer from your tIRA to the charitable organization.
4. Up to 100K (to a qualified 501c (3) charity)
There are some additional rules that came along with the Secure Act:
here is a link for more details:https://www.kitces.com/blog/secure-a...use-reduction/

https://www.schwabcharitable.org/non-cash-contribution-options/making-qcds

https://rodgers-associates.com/blog/qualified-charitable-distributions-from-sep-ira-simple-ira-401k-or-403b-accounts/

[srblanco7]

I had the same thought. Then the question is how to have her transfer the money back to us. The current gift limit is 15K which would work. We could gift her the stock and she could gift us the proceeds. Does doing that raise any red flags with the IRS? It's not hard to see the reason behind that if anyone is paying attention.

Of course, we could gift her the stock, have her sell it, and then have her use that money to pay for stuff that we would normally pay for so that we "get" the money indirectly.

Looking at the IRS website, would appear that if you made the transfer and your daughter sold, she'd have the same capital gains (limiting the tax exception to situations where the recipient's taxable income is low enough keep them in the 0% cap gains bracket). The text in italics below is from the IRS website as it relates to the sale of property that had been gifted.

The general rule is that your basis in the property is the same as the basis of the donor. For example, if you were given stock that the donor had purchased for $10 per share (and that was his/her basis), and you later sold it for $100 per share, you would pay income tax on a gain of $90 per share. (Note: The rules are different for property acquired from an estate).

Most information for this page came from the Internal Revenue Code: Chapter 12--Gift Tax (generally Internal Revenue Code §2501 and following, related regulations and other sources)

[Like2Plan]

And another reference:

What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes

[disneysteve]

Having her transfer the money back to you may qualify as tax evasion.

For sure. Just to be clear, we're not looking to do anything illegal here. But the more I think about it, the more I realize how very simply that could be accomplished. I'm sure that is one of many ways that the wealthy avoid paying much in taxes.

[disneysteve]

You probably already know this, but I thought I would add some additional qualifications for making qualified charitable distributions (QCDs) using a traditional IRA. (The pretax 401k funds can not be used for QCD's but can be used for QCDs after rollover)
1.You must be 70.5

I did know this but I'm not sure I realized you have to be 70.5. I was hoping to be able to do it earlier, so that's good to know.

[james.hendrickson]

For sure. Just to be clear, we're not looking to do anything illegal here. But the more I think about it, the more I realize how very simply that could be accomplished. I'm sure that is one of many ways that the wealthy avoid paying much in taxes.

Correct. Tax avoidance is not the same thing as tax evasion.

[disneysteve]

Correct. Tax avoidance is not the same thing as tax evasion.

Yep. There are many perfectly legal ways to avoid taxation or at least minimize it.

[LivingAlmostLarge]

https://investorplace.com/2021/03/cpng-stock-donated-to-ackman-foundation/

did you see this? He got a lot of tax benefit by donating his stock

[amarowsky]

Paying taxes are high class problems.
Don't fuss over it.

Sounds like that stock did everything you wanted it to.
If you ever sell them, just pay the taxes and you're still way ahead of the game.

100% it's not an issue, it's the greed baked into us all....

[disneysteve]

100% it's not an issue, it's the greed baked into us all....

I don't think it's greedy to seek out legit ways to reduce your taxes.

Look, we pay about $3,000/yr in synagogue dues. If instead of just writing a check, I donate $3,000 of stock that has a cost basis of $1,000, we avoid paying 15% capital gains tax on the $2,000 gain, saving us $300 in taxes. Is it greedy to not want to throw away $300?

[amarowsky]

Correct. Tax avoidance is not the same thing as tax evasion.

I dunno..... It's essentially just two different ways to do the same thing, avoid contributing to our society's collective pot of resources.

It seems the only reason we have these loop holes, to evade paying taxes on income. I wish we didn't have to play around w/ the "semantics" that avoidance and evasion are different.... I too try to avoid evade paying taxes on my capital gains. I payed off some properties this year, and sold a bunch of taxable stock. Wound up showing at roughly $20k profit from my cost basis. I just paid the taxes.

I wish there was a culture or mechanism to make American's proud to contribute to our tax pool, instead of look for ways around throwing money into our pot. I hope someone more wise and smart than all of us, will devise it in the future....

Long story short, I get what you mean DS. But does anyone else agree with the following? It's stupid we have to waste soo many calories on trying to avoid/evade taxes. I wish we could simplify and end loopholes. (would likely require divorcing capital gains from stocks and capital gains on primary real estate gains though).

[Like2Plan]

Long story short, I get what you mean DS. But does anyone else agree with the following? It's stupid we have to waste soo many calories on trying to avoid/evade taxes. I wish we could simplify and end loopholes. (would likely require divorcing capital gains from stocks and capital gains on primary real estate gains though).

I agree with you about the part that the tax system is very complicated--I would love to see a simplified tax code. But, as long as congress gets to decide which behavior is rewarded and which is disincentivized by the tax code, you are going to have some strategies that work better than others. Following the law is not tax evasion.

It is the same reason folks generally hold onto their stocks for a year to realize long term capital gains instead of selling it at less than a year and having short term gains. Congress apparently wants a little bit of stability in the market. I think what is worse is if you didn't know the consequences of doing one thing or the other... Especially after you are retired...

A great example of this is social security and "the hump". The way Social Security is taxed could have a drastic impact on your spending plan.
Here is an explanation:

https://www.bogleheads.org/wiki/Social_Security_tax_impact_calculator

Taking QCD's is apparently another one of those things Congress favors. I think it is brilliant because your charity get more money than you would have otherwise been able to give them. I think it kind of like the government is matching my charitable gift.

[disneysteve]

I wish we didn't have to play around w/ the "semantics" that avoidance and evasion are different.

It isn't semantics at all. Avoidance and evasion are two very different things and it's important to know the difference. Evasion is illegally not paying taxes that you are obligated to pay. Avoidance is not paying taxes that you aren't legally obligated to pay.

The LTCG example is a good one. Let's say I have stock with a $10,000 gain. If I sell it 364 days after I bought it, I will pay $2,400 in taxes. If I wait two more days to sell it, I'll only pay $1,500 in taxes, a savings of $900. It would be stupid of me to sell it two days early. That decision would cost me $900. That isn't tax evasion in any way.

But does anyone else agree with the following? It's stupid we have to waste soo many calories on trying to avoid/evade taxes. I wish we could simplify and end loopholes. (would likely require divorcing capital gains from stocks and capital gains on primary real estate gains though).

Take out the word "evade" from your question and yes, I agree. The system is unnecessarily complicated.

Here's the problem, though. Attempts to "simplify" taxes aren't really so simple. Look at what happened in 2017. The Trump administration changed the tax code. First off, they raised taxes on millions of Americans, myself included. It also raised the standard deduction. Sure, that makes filing simpler because most people no longer have to itemize deductions. However, since there was no longer a tax break for charitable giving, charities saw their donations drop off. Then COVID hit making the situation even worse. So last year, they added in a $300 charity deduction even if you take the standard deduction, and this year it goes up to $600. It's to society's benefit to incentivize charitable giving and the tax code is a big way to do that.

I'd love to see them overhaul the system from the ground up. Just realize that doing so would have a lot of unintended consequences.

[amarowsky]

This sounds more like a "letter of the law" vs. the "spirit of the law" route you're taking. Ultimately, you're looking at contributing less to the community, so you can have more. And you are using "legal" routes to pay less.

The fact that our system leaves in some complicated loopholes. So if you spend enough money/time/resources, you are rewarded by legally dodging more taxes than you ought to pay.

It seems DS, James, and I all agree on the primary point, our taxes are needlessly complicated, so that a certain people are allowed to pay less. Anyone have a tax plan they really like, that has been suggested recently? (I wouldn't expect any REAL tax change from the last 6 presidents personally). IMO - they're all on the exact same team, and based on those teams actions (or lack thereof) they prefer to only write new tax policy that protects those with tremendous resources (1%+ for the most part).

[disneysteve]

This sounds more like a "letter of the law" vs. the "spirit of the law" route you're taking. Ultimately, you're looking at contributing less to the community, so you can have more. And you are using "legal" routes to pay less.

I'm not sure why you put "legal" in quotes.

Do you voluntarily pay more in taxes than you are required to? If not, I'm really not sure what your point is.

And yes, I am absolutely looking to pay less in taxes through any LEGAL means to do so. I think you'd have to be a fool to do otherwise (general you, not you personally).