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Appreciated stocks: A tax-friendly gift for children

The holidays and upcoming end of the 2011 tax year are likely to get many Florida parents and grandparents thinking about appropriate gifts to give their children. These gifts do not always have to be toys or clothes. Parents can set their children on the right financial track by giving them things than can fit into their long term estate plans. Many grantors prefer this method over leaving money to their children or grandchildren until after they have died. This way they can enjoy watching their heirs benefit from their inheritance gifts while they are still living.

Instead of forking over cash, giving a child an appreciated stock can teach lessons on investing and also present state and federal tax benefits. With a stock that has already gone up substantially since it was purchased, a child can track its progress and learn about aspects of the stock market. These are lessons that cannot be learned handing the child a check.

Any individual under the age of 18, or a full-student under the age of 24 with little or no income, can also avoid the capital gains tax that others have to pay on appreciated stocks. If someone outside of these criteria sold their stock, the government would tax the seller 15 percent on their earnings. With kids and low-income students, they do not have to pay taxes on the first $950. The next $950 falls into their natural tax bracket, which is usually zero, so they would be able to walk away with $1,900 tax-free. Anything over that is taxed based on the parent's tax bracket, so it's best to spread these gifts out over time to avoid it.

For those looking to bestow a child with a large gift, keep in mind that an individual can give up to $13,000 to someone else before a gift tax kicks in. If the giver is married, a joint gift between the couple can total $26,000 before the gift tax comes into play.

There are also different routes -- like a 529 savings plan -- that allows one's monetary gift to grow tax-free as long as it is used on secondary education. Parents should explore all their options so that a child does not have to see their gift ravaged by taxes.

Source: Forbes, "3 tax savvy gifts for children," Liz Davidson, Dec. 21, 2011

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