Gifting Investment assets to Lower Income Relatives to Avoid Taxes

By Michael G. Kelly, Attorney at Law

Kelly Law and Tax

Over the last several years the stock market and other investments have experienced tremendous growth.  The resulting income that comes with this growth also increases taxes for investors.

Many investors respond to this increased tax burden by transferring some investments to family members who are in lower tax brackets in order to spread the burden around and reduce it, especially since gift tax doesn’t kick in unless gifts amount to more than $11,000,000 for a single person ($22,000,000 for married couples).

This can be an effective means for income tax reduction when the receiving family members are not minor children.  There are special “kiddie” tax provisions that prevent tax shifting to minors and some young adults who still live at home and college students. Other than gifting to these categories of family members, transferring assets to an adult in a lower tax bracket can be an effective means for lowering taxes.

For example, Dad is making $50,000 per year off of his $400,000 investment activity. His tax bracket is 32%. If he transfers $200,000 of the investment activity to adult son who is in a 22% tax bracket he can reduce taxes from $16,000 to $11,000, a $5,000 tax savings.

Tax shifting often requires considerable planning and requires consultation with a tax professional.