If you are looking for holiday gift ideas, one that could lead to a tax boon for those on your list is a gift of stock or bonds. Why? There are some major tax advantages associated with owning stocks and bonds. For one, some income generated by stocks and bonds is tax free. For another, the sale of stocks and bonds can generate some positive tax results.
Some types of income, such as qualified dividends and interest income from municipal bonds, is tax free to the recipient. The income is usually reported on Form 1040 or Form 1040A (or EZ) under the Qualified Dividends line item, which is offset from Adjusted Gross Income (AGI) and is not included in taxable income. Make sure you have Form 1099-D, dividends, or Form 1099-INT interest income as these forms will include information needed to complete your tax return(s).
Second, the real tax benefits emerge when the stock or bonds are sold. If the investment has appreciated in value (is now worth more than when purchased), the gain on the sale won’t be subject to tax-most of the gain on capital gains is taxed at a zero rate, if the seller is in low income tax brackets (which many younger individuals are). Or, if the investment ends up losing value the stock or bonds can be sold for a capital loss, which will offset some earned income. Let’s take an example from a few years back. Say you had bought even one share of Google stock, when it was trading around $200 per share a few years ago (about the cost of an Xbox 360). Google shares reached a value of nearly $700 at one point in their trading history. If you had given that one share of stock instead of an Xbox 360, the recipient would have a gain of close to $500 ($700-$200) if they sold the stock, all of the gain tax free (assuming they were still in the lower income tax brackets).
Keep a record of all stock or bond purchases you make, specifically the cost of the asset when bought as you will need this to calculate your gain or loss. You will need to use Schedule D for Form 1040 to report gains and/or losses. If you buy a lot of shares of stock at different times of the year, the Internal Revenue Service (IRS) allows you to use different methods to determine the cost of the shares you sold for gain/loss purposes. Check out http://www.irs.gov/ for information about available methods.
Be aware that gifts to children of income producing stock or bonds (that is, stock that pays taxable dividends or bond interest income) may generate tax on the unearned income (that is, income not from wages or tips). Also, there may be gift tax concerns associated with a gift of stock or bonds, if the value of the gift approaches the gift-tax limits. And while most people don’t think too much about it, there may also be estate tax concerns. For the majority of taxpayers, though, a gift of stock or bonds may provide tax free income now and tax benefits later on, the gift that keeps on giving.