Taxes on Gifts of Stock

My mother wants to give me some stock that she acquired many years ago. What would be my cost basis? Do I pay tax based on the value on the date I received the gift? The stock has appreciated over the years.

Determining the basis is usually simple when you're given a stock that has appreciated in value. In that case, your basis is the same as your mother's basis -- generally the amount that your mother originally paid for the stock and any reinvested dividends (plus brokerage commissions).

You also can use your mother's holding period. Because your mother owned the stock for several years, you'll be taxed at long-term capital gains rates no matter when you sell -- even if you end up owning it for less than a year.

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But gifting stock to a grown child actually can create a bigger tax bill than your mother would have had herself. If she's in a lower tax bracket than you are, it would be better if she sold the stock herself, paid capital-gains taxes at her lower rate, then gave you the cash (you can give up to $12,000 per person per year without being subject to gift taxes). People in the 10% and 15% income-tax brackets only pay 5% in long-term capital-gains taxes. That long-term capital gains rate falls to 0% in 2008 through 2010 for people in those lowest two tax brackets. Everyone else pays 15% in long-term capital-gains taxes.

Or you may do even better tax-wise if she holds onto the stock and gives it to you after she dies (as long as she isn't worried about getting it out of her estate now to avoid estate taxes). If you inherit the stock instead, your basis generally will be the value of the stock when your mother dies. This "step up in basis" eliminates the tax bill on years of increases in the stock's value.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.