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I'm trying to file a return for my son, and I'm stumped.

My (now ex-) husband and I gave our son approximately 10K each worth of stock in 2000 and 2001 as gifts towards his college expenses. The cost basis for all the shares was $3.06/share (purchased in 1997). The stock was sold in two lots in 2001, for $18.31 and $18.02 per share respectively, with a total gain on the sale of approximately $13297.

Does he have to pay taxes on the sale of this stock since it was a gift, or not? From what I can tell from the tax tables, it looks like he may owe over $2K - yikes!!

He also had earned income of $2278 (no fed. or state taxes were withheld) and was claimed as a dependent on my ex-'s return. If anyone can shed some light on this, I'd be grateful.
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Does he have to pay taxes on the sale of this stock since it was a gift, or not?

Yep - he sure does. The gift just means that he takes on the donor's cost basis and holding period.

From what I can tell from the tax tables, it looks like he may owe over $2K - yikes!!

Sounds a bit high to me. His earned income will be covered by the standard deduction, so his taxable income should be just the capital gain. He's in the 15% bracket, so the long-term capital gain would be taxed at 10% or a little over $1300. Make sure you're figuring his tax on page 2 of schedule D. State taxes could add enough to the total to get to $2k, though.

Perhaps looking at it another way might help. Had you sold the stock and given him cash instead, you'd have to pay the tax on the gain, likely at twice the rate he's paying. So the gift of stock instead of cash could very well be an excellent move from a tax standpoint.

--Peter
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Does he have to pay taxes on the sale of this stock since it was a gift, or not?

Well, someone has to pay tax on the gain! Your son is the stuckee. But it's not so bad:

- Even though he's a dependent, he gets a standard deduction of $2528 (his earned income + $250) - see the worksheet on p. 31 of the 1040 booklet.

- He does owe capital gains tax on that $13,297. But he not only took over your basis, he took over your holding period as well - so these are long term gains, taxed at just 10%. Just carefully follow the instructions on Schedule D.

So, yes, taxes are due, but not as much as you fear. Probably state taxes as well.

Lorenzo
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P.S. I meant to add, well done on that stock! A six-bagger, going from $3 per share to $18 per share in just five years.

Lorenzo
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Thanks guys, for the assistance. I guess I just got all tangled up in page 2 of Schedule D and was adding the $1306 to what was shown on the tax table instead of taking the smaller of the two #'s. That'll teach me to wait until the weekend before they're due to start working on 'em. :-)

Other good news...no state taxes (live free or die!), and my ex- is picking up the tab for Junior's tax liability (since he didn't set aside any $$ to cover the tax hit for him in the first place).

And Lorenzo, the kudos on the stock aren't really deserved...I'm holding all the remaining stock (SUNW), which is currently trading for less than $8/share. Right about now I'd be thrilled if I could unload it for $10, let alone the $18 my son made when he sold it last year. ;-)
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My (now ex-) husband and I gave our son approximately 10K each worth of stock in 2000 and 2001 as gifts towards his college expenses.

Without reading the thread again I can't remember if I'm being redundant. Along with the cost basis, your gift also included your holding period. So, even though your son owned the stock for only a short time, his holding period goes back to your 1997 purchase.

Phil Marti
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