My parents are in the process of transferring some shares of one of their mutual funds into my name. I’m wondering how I will need to treat this on my income tax return next spring.
Can someone point to an IRS publication that will tell me how to treat this gift?
Looks like it’s now at $14,000 for anyone. I do not believe that they make exceptions for adult children until the parents die and then it is covered under the estate tax rules. There do appear to be exceptions for tuition, medical and college expenses.
It’s still not taxable to you, ever, for any amount under US tax regs.
Later, the estate may have to pay, but only if it even needs to file, which is highly doubtful.
Whe you sell it, the Basis is the value at the closing bell at the time of transfer.
Interesting. This is basically a transfer of wealth from one person to another; how does this “get around” the gift tax laws? By being under $14K? It would help if the OP mentioned the amount of the transfer I suppose.
Gift taxes apply to the giver, not to the receiver of the gift.
The giver of the gift, on any value of the gift above the $14K annually, has to either
Pay the gift taxes
Subtract the over-14K amount from the eventual exemption for the estate tax after his death. The individual estate tax exemption is currently $5.25M.
So I could have been living off the kindness of others all this time? I would have tried to be more charming had I known. 
Wouldn’t I still have to pay income tax?
No, generally speaking, you don’t pay income tax on gifts (because someone else has already paid it essentially, and the general reasoning is that the givers tend to be taxed at higher rates than recipients).
No, no income tax. But: the IRS defines “gift” as something given out of “detached and disinterested generosity” and out of “affection, respect, admiration, charity or like impulses.”
If the IRS suspects that someone is “gifting” you for the work you’re doing for them, they will come down on you hard. Also, when someone pays you, they (usually) get to write it off their taxes. With gifts they don’t.
See the IRS FAQ on gift taxes. The only person excluded is a spouse. All others are treated the same.
The OP should note some things:
The gift should be assessed based on fair market value. Not the value of the mutual funds when they were bought.
Both parents can make a gift together, doubling the amount before paying taxes.
The amount over the limit is taxed, usually paid by the donor.
See the link in the FAQ to the official rules.
I assume the donors (parents) will have to pay capital gains tax on the difference between the value of the stock at the time of donation, and the original cost of the stock?
It doesn’t have to be. It can be subtracted from the estate exemption. Since most people won’t be leaving their kids anything close to $5.25M in their estate, that means that practically, for most people, there is no gift tax on gifts, even if it’s over $14K in value.
No, the OP will have to pay this when he/she sells or otherwise makes a taxable disposition of the stock, but the cost basis (original cost) will be what the parents paid for it.
Where is this shown in IRS rules? I can’t find any mention of it in Publication 950, which would seem to be the obvious place.
I did a quick search. Not an IRS doc, but:
Second, gifts in excess of the annual exclusion may still be tax-free up to the lifetime estate basic exclusion amount ($5,120,000 in 2012), although for estates over that amount such gifts might increase estate taxes. Taxpayers that expect to have a taxable estate may sometimes prefer to pay gift taxes as they occur, rather than saving them up as part of the estate.
The keywords here are “unified credit”. This is a lifetime, non-refundable, tax credit equivalent to the tax on $5 mil (+/-). It can be used on gifts as you go through life. Any **unified credit **remaining when you die can be used to reduce or eliminate your estate taxes.
Yep, that’s the magic word. Found it now, thanks!
True if the fair market value of the stock on the day of the gift is greater than the parents’ basis.
If the fair maket value is less, then the rules become a bit more complicated. Basically, the calculation is done to make sure neither the donor nor the recipient gets any benefit from any DECREASE in value while the donor held the stock.
In order to save yourself a massive headache when you go to sell the stock, get a copy of your parents’ records relating to the original purchase so you can determine their basis, which you will need in order to determine your taxable profit/loss when you sell. Also, get and keep a copy of a brokerage statement or other document that shows the value of the gift on the date of transfer.
And, incidentally, if the value of the shares has gone down since your parents purchased them, it is very foolish from a tax perspective to give them as a gift. Neither one of you will benefit from the decrease. If this is the case, it would be far wiser for your parents to sell the shares, claim the tax loss, and give you the money to buy your own shares.
Good catch. The issue of FMV<Basis completely slipped my mind.
Was the $5,000,000 reinstated? I thought that it expired with the Bush tax cuts.
I am not sure exactly how it works backwards though. That is, let’s say I decide to give my kids $5.25M each in 2013. That maxes out the “unified credit” - when I die, my estate won’t have any exemption left, and they will have to pay estate taxes on the whole thing. But what if, by the time I die, the Congress reduces the exemption (and unified credit) to $1M. I certainly hope no retroactive taxes will apply to my kids. Any CPAs around?