"Shyster1040" <Shyster1040[at]nospamhotmail.com> wrote:

- quote -

Wouldn't the fact that the child used the money from the
sale of the gifted stock to pay his tuition cause him to
lose his eligibility as a dependent? To claim the child as a
dependent, the parent would need to pay at least half of his
support. The parent is probably not paying much of anything
to support the child away at college other than his tuition
and room and board. If the child pays his own tuition,
wouldn't this jeopardize his standing as a dependent? The
money saved by having the child sell the appreciated stock
with zero capital gain might be outweighed by the loss of
the dependent deduction.

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"Tony Cox" <tc[at]coxrt.com> wrote:

- quote -

As far as I'm aware it's a judge-made rule to do equity by
linking together interdependent steps. The step-transaction
doctrine has been approved by the Supreme Court.

- quote -

If it looks like a quid pro quo it may well be treated as
one. I was once involved in a case where two people set up
and funded trusts for the other's children. The court
treated it as each setting up a trust for his own kids.

- quote -

There is no one-size fit's all in this case. It's a very
subjective situation, and each case must be analyzed on its
own merits.

Stu

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- quote -

No, but the only reason you know that the original
questioner planned to avoid tax was that he detailed all the
proposed steps for you and explained his intent!

But I see the objection isn't so much that the gift exchange
is "pre-arranged"; rather, it is the claim that the gifts
themselves are a sham.

Which brings up an interesting point (to me). Here we have
several transactions, each of them "tax free", unreportable,
and legal in their own right (we have only a confession to
indicate otherwise), somehow made collectively illegal by
the subjective analysis that they are a scam. Are there
other areas in tax law where this is true too? Sounds more
like a loophole to me, rather akin to stock trading to avoid
taxes that got plugged with the "wash sales" rule. I'd
expect to see something in the code clarifying what that
rule is.

Presumably the collective outrage of a number of regular
contributers here is based on more than simply a sense of
injustice that someone might even think to try such a thing!

- quote -

So would gifting stock one Christmas from A to B, followed
by a gift of cash from B to A the following Christmas be
illegal? What about gifting back 10 years later? I mean,
absent of some sort of written "quid pro quo" contract, how
would anyone prove they weren't gifts?

If my parents gift me stock which I then sell in a lower tax
bracket, am I forever forbidden from giving them a gift in
return, since it might have been purchased with "the
original gift or its proceeds"??

Somehow I think this needs more analysis than just an appeal
to the "step transaction doctrine". It needs a a set of
definitive rules.

- quote -

As long as each individual glass is valued at less than $12K
($24K if married filing jointly), no one need have a heart
attack here!

Moderator:
The heart attack is from getting a gift from me!

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"Tony Cox" <t...[at]coxrt.com> wrote:

- quote -

If you are giving each other phony gifts to evade income
taxes you should be paying on disposition of the "gift"
items, then yes, you should turn yourselves in.

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- quote -

If the gift exchange lowered your income tax, and the
"gifts" were given only on the condition of receiving a
"gift", then yes, in fact, you should.

What part of "it's not a gift unless there are no strings
attached", substance over form", and "step transaction
doctrine" haven't you heard of?

In any event, in the original poster's scheme, it's pretty
clear that the recipients of the "gift" are only getting the
"gift" because they are giving the money right back after
selling the stock. So there's no gifting going on, the
"giver" is treated as if he sold the stock himself, and he
needs to report it that way on his return.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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"Tony Cox" <tc[at]coxrt.com> wrote:

- quote -

If these gifts are somehow affecting your income tax
returns, yes.

--
Phil Marti
Clarksburg, MD

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- quote -

In the original question, capital gains were being gifted for
the purpose of avoiding taxes. Is your family doing that?

Gifting to avoid capital gains taxes can be a tax planning
strategy, but structuring a transaction so that the original
gift or its proceeds are returned to the gifter is tax fraud
since it is not really a gift.

Over the last 40 years, I have rarely given gifts to any of
my relatives except my lovers and my children. This year I
sent each of my father's wives and children with whom I am
still on speaking terms a set of etched English Pub Glasses
(See: http://www.tinyurl.com.yr2dar). Of course, to avoid
the year end mail crunch, I waited until mid-January to place
the order. Thus, the heart attack reports have yet come in.

Dick

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- quote -

My family exchange gifts as part of a pre-arranged plan too.
At birthdays and Christmas, and sometimes (shudder) just for
the hell of it.

You think that this is some sort of tax fraud that we should
turn ourselves into the IRS for?

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"kastnna" <kastnna[at]auburnalum.org> writes:

- quote -

Since this is all part of a pre-arranged plan, there are
no true gifts involved, the "gifts" are shams, and the whole
thing is tax fraud.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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Someone please poke the holes in these thoughts.

HYPOTHETICALLY, are there any provisions I am overlooking
that prevent my parents (high tax bracket) from gifting $48k
in appreciated stocks to me and my wife (low tax bracket).
We then sell them in 2008, realize the CG at 0%, repurchase
the stocks, and regift them to my parents.

Unfortunately, my wife and I are just barely above the 15%
tax bracket, but suppose we weren't. Or could they gift to
another, younger family member that has little or no income.
Would AMT ever apply?

Thanks

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njoracle wrote:

- quote -

Not to contradict anything anyone else contributed, but it's
useful to remember that taxable income reflects adjustments
and standard/itemized deductions and exemption deductions.
These offset the ordinary income first. It's possible to
have capital gains income that equals or exceeds the total
taxable income. So, in a year when one expects large
capital gains, lowering ordinary income and maximizing
adjustments and deductions can be even more rewarding than
normal.

-Mark Bole

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A.G. Kalman wrote:
- quote -

===snipped===

Thanks for all the great answers to my question from
everyone in this NG. Being retired, my income is fairly
predictable. Therefore, in 2008 I'll just sell enough to
still keep me in the 0% capital gain bracket.

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njoracle wrote:

- quote -

Q1. Using your example of $60K before capital gains and $95K
after gains and assuming this is a joint return and that in
2008, the 15% tax bracket ends at $65K you would get the
following result: $5K taxed at zero percent and $30K taxed
at 15%. The reason for this is that your ordinary taxable
income of $60K is $5K below the $65,000 limit of the 15% tax
bracket.

Q2. If you sell your house with a $750K realized gain you
will pay tax on your recognizable gain. How much gets taxed
at 0% and how much gets taxed at 15% depends upon your
ordinary taxable income. See above.

--
Alan
http://taxtopics.net

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Unfortunately the article doesn't really clearly explain how
the 0% rate applies. The gist of the article appears to be
that a person with significant non-capital gains income can
indirectly take advantage of the 0% rate by transferring (by
gift) appreciated property to persons who will have little
or no taxable income of any sort for '08, e.g., one's
college-age or younger children. By doing so, and depending
on your gift-tax exposure, the child would sell some of the
appreciated property in '08 and take advantage of the 0%
rate, effectively permitting the parent to transfer a
greater sum to the child than the parent could have done if
they had transferred money that had already been taxed.

In other words, if you're going to have to pay for your
child's education anyway, instead of paying the tuition
directly using money that you've already paid, say, a 30%
income tax on, transfer appreciated property with a value of
$12k or less to the child (thereby avoiding gift tax on the
value of the property) and have the child sell the property
and use the proceeds to pay the tuition.

Since most parents are unlikely to get much benefit out of
paying tuition costs directly because of the phase-out of
the education credits, in the scenario described, it would
make more sense to transfer the appreciated property to the
child and let them pay the tuition themselves. Provided
that the child's total taxable income, including any gain
from selling the appreciated property, was less than about
$33,900 for '08, the gain on sale of the property would be
taxed at the 0% rate. Of course, this only makes sense if
the property is substantially appreciated, since the basis
in the property is the parent's cost as measured in
after-tax dollars invested in the property - thus, the basis
represents money already taxed.

For example, suppose Parents, who file joint, will have
$90,000 of wage income for '08, and will therefore not
qualify for the 0% rate. Suppose also that they intend to
sell stock with a value of $12,000 to pay for child's
tuition in '08, and that child has her own taxable income of
$10,000 from wages. If the basis in the stock is $1,000,
then gain from the sale will be $11,000. If Parents sell
the stock, they will pay tax of $1,650 on the sale, leaving
them with net cash of $10,350 ($12,000 proceeds, less $1,650
tax) to spend on child's tuition. On the other hand, if
Parents make a gift of the stock to child, and child sells
the stock for $12k, then child will also recognize $11k of
gain (basis transfers in this case), will have total taxable
income of $21,000, thereby qualifying for the 0% rate on all
of the gain, and will pay a tax of $0. As a result, child
will have net cash of $12,000 ($12,000 proceeds, less $0
tax) to pay her own tuition. In addition, child is likely
to qualify for one of the education credits, resulting in
even less tax due on her other wage income. Assuming that
child qualifies for a $1,000 education credit as a result of
paying her own tuition (which should be fully useable with
other taxable wage income of $10,000), the net effect of
Parents transferring the stock to child instead of selling
it and paying the tuition themselves could be as great as
$2,650; i.e., child receives $2,650 more in economic benefit
- money to spend - than if Parents had sold the stock
themselves. That's a nice present from Uncle Sugar.

In particular, it should be noted (the article you refer to
does not highlight this point) that the amount of capital
gain that qualifies for the 0% rate is the amount of gain
you have that, as a general rule of thumb, does not exceed
$33,900 minus the amount of your non-long-term-capital gain
income ($67,800 minus non-cap gain income if filing
jointly).

In other words, if your non-long-term-capital gain income
exceeds the threshhold at which the 25% rate bracket applies
(approximately $33,900 or $66,800 for single/joint,
respectively, for '08), then none of your capital gains will
qualify for the 0% rate and will, instead, be taxed at the
by-now-normal 15% rate.

So, to answer your questions:

Q1: No, the amount of capital gains will not, by itself,
disqualify you for the 0% rate; however, the amount of gain
that qualifies will decrease as your other income increases,
and none will qualify if your other income exceeds the
bottom of the 25% rate bracket. Thus, given your facts, if
you file single, your other income exceeds the cap for '08
of approximately $33,900, and none of your cap gains will
qualify; if you file joint, your other income is below the
cap of approx. $67,800, but only about $7,800 of your cap
gains will qualify for the 0% rate, the remainder ($27,200 =
$35k - $7,800) will be taxed at the 15% rate.

Q2: First, you cannot sell your house to your wife and
recognize either gain or loss, see Code Section 1041(a).
Sec. 1041 is mandatory and prevents gain recognition even on
arms' length sales between spouses. See,e.g., Temp. Treas.
Reg. 1.1041-1T(a), A-2. Instead, the transfer would be
treated as a gift from you to your wife, and any
consideration she paid you would be treated as a gift from
her to you. As a result, regardless of your other income,
selling your house to your wife would not permit you to
recognize any of the unrealized appreciation in your house,
or to take advantage of the 0% rate.

If you were to sell your house to a third party, however,
assuming that you and your wife had no other income for '08,
and that you file jointly, only about $67,800 of the gain in
excess of $500,000 would qualify for the 0% rate. The
remaining $182,200 of that gain would be taxed at the 15%
rate. To the extent that you have other income, that other
income would reduce the amount of such gain that would
qualify for the 0% rate and, once your other income exceeds
$67,800, none of your gain in excess of $500,000 would
qualify for the 0% rate.

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- quote -

who would have investment or deferred income substantially
greater than that. Might work for a modest retiree who is
sitting on stock for a long time that may be mostly gains
and wants to tke it w/o taxes.

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njoracle <njoracle[at]att.net> writes:

- quote -

Long-term capital gains have two rates: 5% (0% in 2008) and
15%. The 5/0% rate only applies to that gain which would
fall into the 15% ordinary income bracket if the gain were
ordinary income.

Using the 2007 brackets for the example (since we don't know
what the 2008 brackets will be), we see that for MFJ, the
top of the 15% bracket is at $63,700 of taxable income.

So if you had $60,000 of taxable income (not counting the
long-term gain) and $35,000 of long-term gain, then the
first $3,700 of the gain would be taxed at 0% and the
remaining $31,300 at 15%.

- quote -

Yes. See above.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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A Jan 17, 2007 article in the Wall Street Journal states the
following regarding people in the bottom two tax brackets:

"If you still have confidence in your investment, but you
want to take advantage of the zero rate next year, here's a
strategy to consider: Sell some of the investment at a gain
in 2008, and then immediately buy back shares of the same
investment. That means you can still enjoy that zero rate,
maintain your position in the security but have a higher
basis when you eventually sell the new shares. (The strategy
doesn't run afoul of so-called wash-sale rules, because
these only apply when selling an investment at a loss, not
for gains.)"

Question 1: Will the sale of stocks in 2008 and the
associated capital gains throw you into a higher tax
bracket. For example, if taxable income in 2008 is $60,000
and capital gains are $35,000, does this throw you into a
higher tax bracket and therefore the 0% tax on capital gain
would not apply?

Question 2: I have about $250,000 capital gain in my house
(after the $500,000 exclusion). If I sell my house in 2008,
do I pay any capital gain tax? If no tax, can I sell the
house to my wife and get the favorable tax treatment?

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