At death, parents can bequeath appreciated stocks or funds to a child. Under current law, the child will get a basis step-up to market value and owe no income tax on prior appreciation. At least one year must pass between the date of making a gift of the shares and the death of the parent. (This rule prevents deathbed transfers.)
Specific Details
The parents shifted $5,000 of income to their child by bequeathing appreciated stocks or funds to their child. Since the parents income was taxed at the 20% tax bracket, the income reduction may decrease their income taxes by $1,000 ($5,000 x 20%). Since the childs taxable income was taxed at the 0% tax bracket, there may be no tax on the income. Therefore, because of the income shifting, the total family tax savings may be $1,000.
Potential Savings
If you are in a combined (federal, self-employment, and state) tax bracket of 20%, you could reduce your taxes up to $200 for every $1,000 of income reduction by bequeathing appreciated stocks or funds to your child.