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My father wants to transfer stocks to me. How does such a transaction affect his taxes and mine?
Your father's income taxes are not affected his transferring stock to you. His taxable estate will be reduced, which is usually a good thing, but there is no effect on his federal or California taxes. If the value of the stock is greater than $13,000, he must file a gift tax return to report the transfer to IRS. No taxes are paid with the gift tax return unless the value of the stock is over the lifetime exemption equivalent ($5,120,000 for 2012).
The gift tax return will report your name, address and your relationship to your father but not your social security number. If your father is married and the stock is considered community property, it's possible that a gift tax return is not required. The instructions for Form 709 will give you the rules that apply to a gift from a married person. If your father will have a taxable estate when he passes away, his estate tax bracket will be affected by the prior gift to you. Most people do not worry about estate taxes because they apply to less than 10 percent of the population currently.
As for you, there is no income tax implication of receiving a gift from your father. If the stock pays dividends, you will receive the dividends after the transfer and pay tax on them. If you sell the stock, your gain will be based upon what your father paid for the stock and not what it was worth when he gave it to you. If you're young and still a dependent of your father, any gain on the sale of stock might be reported at his tax rate rather than yours. But if the stock was held for more than 12 months total between the two of you, the 2012 tax rate would not be higher than 15% on a stock gain.
Mary Kay Foss, CPA, is a director at Sweeney Kovar, LLP, in Danville. You can reach her at (925) 648-3660(925) 648-3660.
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