Another way children can help cut the family tax bill is with gifts of appreciated securities. If you give a child stock or mutual fund shares that have appreciated, for example, the tax bill on the increase in value is passed on to the child along with the gift. Assume that stock you bought for $2,500 is now worth $5,000 and that you have a tuition bill coming due. If you sold the stock, you'd owe tax on the $2,500 gain. The 15 percent rate on long-term capital gains means that would cost you $375. Not bad, perhaps, but there's a way to cut the bill in half.
How? By giving the shares to your college student. When sold, the same $2,500 would be taxed, but at the child's rate (assuming he or she isn't a prodigy who has started college before age 14). If he or she falls in the 10 or 15 percent bracket, the 15 percent long-term capital gains rate would apply and the tax bill would be $125. Don't think your child has to hold on to the stock for at least 12 months to get special capital gains treatment, either. When gifts of appreciated asset are involved, the recipient's holding period includes time that the donor owned the property.
What if you didn't really want to part with the stock? You could always reinvest in the shares with the cash that otherwise would have gone for tuition. You'd be taxed only on appreciation from that time on. (Take care not to let this strategy cost you a dependency exemption, which it could if, with the gift money, the child winds up supplying more than 50 percent of his or her support.)
All this attention to generosity demands a brief mention here about the federal gift tax. The law permits you to give up to $11,000 (for 2004) to any number of people without having to worry about the gift tax. If you're married, you and your spouse can give up to $22,000 to each person on your gift list. Gifts above those levels are subject to the gift tax. When it comes into play, this tax is imposed on the giver of gifts, not the recipient. And, since there's a credit to offset the tax on the first $1 million of taxable gifts (for 2004), you probably won't pay any gift tax for 2004. But the tax reduces the amount of the credit you can use against the estate tax, so if you have a large estate, some tax may eventually be due.
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