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A quick follow up please. Can she spend the money on any college expenses like room and board and books, or a gift only eligible for tuition?
Another expert here - Your daughter can use the gift (money) for whatever she wants. There is no restriction on her. I hope this helps. Thank you.
Hello and thank you for your question.
Third expert here. The gift would be tax free to you and your son (IRC 102(a), IRC 2503).
The sale of the stock would result in a capital gain, and yes, your son should file a tax return. This is because the kiddie tax will most likely apply, and the tax will be levied at the parental rate (IRC 1(g)). Note that net long-term capital gains are taxed at 0% for people in the first two tax brackets, so the kiddie tax may in turn amount to $0 pending your taxable income (American Taxpayer Relief Act of 2012).
I hope this is helpful.
Thank you, experts. I am just looking for the most tax efficient way to use $25k in stock that includes a $10k long term gain to pay for my child's college. What with the increase in capital gains taxes to 20% and even more depending on if I my business does well (>$250k), I'm concerned that 10 years of investing for college expenses will now be eaten up by taxes. I will be sure to check the IRCs BK-CPA provided.
Due to the kiddie tax, transferring the stock to your child and then having him/her recognize the gain will not relieve you of the tax, so it is simplified if you just sell the stock yourself and then gift the proceeds. In doing so, you can avoid the transfer of stock (paperwork) and also your child having to prepare a tax return with the kiddie tax forms.
Capital gains may be offset by capital losses. Other deductions and credits can also reduce your overall tax burden, just as with any other year. If you own a business, perhaps you can invest in it to reduce your taxable income through bonus depreciation or IRC 179 expensing, etc. In any case, that would be a whole new question (ie... Given my income of X and my deductions of X, marital status, etc., how can I reduce my taxes?... the more information you provide for a question like that, the better).
Again, I hope this is helpful.