Updated: Feb 21
Yes, the tax laws are complicated. But if you plan, you can achieve some good results.
For instance, the qualified dividends (paid out of profits of a corporation) and long term (held more than a year) capital gains can be taxed at zero in certain instances.
If a single person has taxable income (after deducting the 2019 Standard Exemption of $12,200), of only qualified dividends and/or long term capital gains that are less than $39,475 in 2019, the tax is zero.
For a married couple, if their only taxable income of qualified dividends and long term capital gains (after deducting the 2019 Standard Exemption of $24,400), are less than $78,950 in 2019, the tax is zero.
For example, if your aunt Sue is age 59 and is not having much taxable income (say $5,000 after her 2019 Standard Deduction of $12,200), then she could have qualified dividends and/or long term capital gains of about $34,475 and still pay zero income tax. ($39,475 - $5,000)
If you had public traded stock (ie IBM) that you purchased long ago for $8,000 and is worth about $18,000 today, the gain on sale by you would be $10,000. If you sold it and paid $1,500 in capital gains tax, you could make a gift to Aunt Sue for the gain less the tax of $8,500 ($10,000 gain less $1,500 in capital gains tax) and you would have your original cost of $8,000 back.
Aunt Sue would have $5,000 of wages, interest and/or retirement income plus she would report the sale of the IBM stock with a gain of $10,000. She would pay no tax because the capital gain has special rules. If you gave her the gain less your tax of zero, she would have $10,000. That is better than the $8,500 if you sold the stock.
If Aunt Sue was older and received some Social Security Benefits, she might have some additional taxable income, but it depends on her other income, total income, etc. Doing a draft return would show how much capital gain she could have and still have zero income tax.
If you are already helping a relative or other person by making gifts, you might need to file form 709 U.S. Gift Tax Return. But you can do “taxable” gifts (more than the $15,000 per person Annual Gift Exclusion) of more than $11,000,000 before you would need to pay a gift tax to IRS.
Planning can help you achieve your goals and desires. Did you hear “Flowers always make people better, happier, and more helpful; they are sunshine, food and medicine to the soul.” Luther Burbank Horticulturist