A client should consider gifting appreciated investments to a child and letting the child sell the investments and use the proceeds to purchase major items, such as, cars, computers, and college. The client could use the funds saved by not paying for these items to buy back the investments that were given to the child. The client will end up with same investments, but with a higher tax basis.
Specific Details
The parents shifted $5,000 of income to their child by gifting appreciated investments to a child and letting the child sell the investments. 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 shifted to your child by gifting appreciated investments to your child and letting the child sell the investments.