The IRS has announced that it is working to correct erroneous failure-to-file penalty notices triggered by a programming error. The error caused some monthly and daily deposits of payroll taxes that were made timely by April 18, but after April 15, to be considered as paid late even though April 15 was a federally observed legal holiday in the District of Columbia (Emancipation Day).

Erroneous failure-to-deposit penalties will be remedied. the IRS says that, in some instances, taxpayers were assessed failure-to-deposit penalties as a result of a programming error that treated some monthly and daily deposits of payroll taxes that were made timely by April 18, but after April 15, as paid late. The IRS says it is working to resolve the issue and correct the erroneous penalty assessments in the near future. No taxpayer action is required at this time. Those affected will receive correspondence when the issue is resolved.

If you have questions regarding the penalty notices, BiggsKofford is here to help. Call us at 719-579-9090 or send us an email to info@biggskofford.com.

BiggsKofford, one of the leading certified public accounting and business consulting firms in Colorado, announced today the promotion of Braden Hammond, CPA/ABV to Director. Hammond joins the firm’s team of seven directors: Chris Blees, Kurt Kofford, Greg Gandy, Greg Papineau, Michael McDevitt, Deborah Helton, and Austin Buckett.

Hammond joined BiggsKofford in 2001 and has a passion for the technical aspects of auditing and accounting. He understands that, rather than merely providing a historical report, an audit can help a move a company to its next level of success. In 2006, he was promoted to Manager and has continued to dedicate his hard work and leadership skills to the firm.

“Braden is an extremely valuable member of the BiggsKofford team,” said Chris Blees, Managing Partner. “He has the entrepreneurial spirit that all BiggsKofford Directors have.”

Founded in 1982, Colorado Springs-based BiggsKofford currently employs more than 25 professionals. BiggsKofford offers integrated business solutions, including tax, accounting, merger and acquisitions consulting, business valuation and litigation support.

BiggsKofford has expanded its services to meet the changing needs of over 500 business owners and entrepreneurs in Colorado’s Front Range.

Media, contact Jenn Watton at (719) 579-9090 for more information.

(Journal of Accountancy By: Sally P. Schreiber; Published March 1, 2016)

Payroll and human resources departments should beware of an email phishing scheme in which cybercriminals pose as company executives (including CEOs) and ask for confidential employee information, such as Forms W-2, Wage and Tax Statement, and employees’ Social Security numbers, address, date of birth, and salary, the IRS warned on Tuesday. Once this information has been stolen, it can be used to commit a number of crimes, including filing fraudulent tax returns to obtain refunds.

“This is a new twist on an old scheme using the cover of the tax season and W-2 filings to try tricking people into sharing personal data. Now the criminals are focusing their schemes on company payroll departments,” IRS Commissioner John Koskinen said in a prepared statement. The fraudulent emails use what is called “spoofing,” which makes it appear the messages are from company executives, and often contain the name of the company’s CEO. Payroll departments are warned not to respond to these emails without being sure of who they are sending this information to.

The IRS says its Criminal Investigation division is reviewing several cases in which this latest variation on phishing has tricked people into supplying confidential employee information to cybercriminals.

The IRS recently reported detecting a 400% surge in email phishing schemes and malware attacks this tax season. It reminded taxpayers to be vigilant in protecting their personal information. Phishing schemes recently made the IRS’s annual “dirty dozen” list of top tax scams (see prior coverage here).

If you have questions about any of these scams, BiggsKofford is here to help. Call us at 719-579-9090 or send us an email to info@biggskofford.com.

(Journal of Accountancy By: Paul Bonner; Published February 26, 2016)

Another 390,000 taxpayer accounts have been identified as potentially accessed by thieves that hacked into the IRS’s “Get Transcript” online application, the IRS said Friday, bringing the total number of accounts affected to approximately 724,000.

The breach was discovered last May, when the IRS initially identified possible unauthorized access of about 114,000 taxpayer accounts. Then, last August, the IRS revised that figure to 334,000. The application on the IRS website, launched in January 2014, was intended to allow taxpayers to more easily obtain records of their prior tax filings. It has remained suspended since the data breach was first discovered.

Friday’s revelation of the additional accounts potentially breached was the result of a nine-month investigation by the Treasury Inspector General for Tax Administration. In addition, the investigation revealed hackers had targeted another 295,000 taxpayer transcripts but failed to gain access to them.

As in the previous discoveries, the IRS said it will notify taxpayers whose accounts may have been accessed, allowing them to request identity protection personal identification numbers for more secure tax filings, offering free credit report fraud monitoring for a year, and more closely scrutinizing returns with those Social Security numbers.

The latest revelation also comes just days after the IRS also revealed that it had discovered and stopped an attempted attack on its e-filing personal identification number (PIN) system in January. No personal taxpayer data were compromised in that attempted breach, the IRS said.

We hope this information is helpful. If you would like more details about the hacks, please do not hesitate to call Greg Gandy or Michael McDevitt at 719-579-9090.

(Journal of Accountancy By: Sally P. Schreiber; Published February 17, 2016)

Every year, the IRS releases a list of what it calls the worst tax scams of the year. Beginning Feb. 1 and ending on Feb. 17, the IRS issued a news release each day highlighting a scam. These “dirty dozen” scams can be encountered at any time of year, but the IRS reports that they peak during tax season.

1. Identity theft

According to the IRS, the No. 1 scam this year is tax-related identity theft, which the IRS defines as when someone uses a taxpayer’s stolen Social Security number to file a tax return claiming a fraudulent refund (IR-2016-12). Although the IRS has introduced more effective screening and detection systems that are designed to detect identity theft before it issues a refund, the Service admitted that it is still a major problem. To fight the problem more effectively, over the past year, the IRS has participated in a Security Summit initiative in partnership with states and the tax-preparation industry to try to improve security for taxpayers. The participants share information of fraudulent schemes that have been detected this filing season to provide increased protection. More than 20 data elements are used, unknown to taxpayers, to verify tax return information.

In addition, the IRS urged taxpayers to protect their own information so it is harder for thieves to breach the IRS’s security systems. These efforts at taxpayer education include the Taxes. Security. Together. campaign to help taxpayers avoid the data breaches that make it easier for them to become victims.

2. Phone scams

The second scam this year is phone scams, in which criminals call, impersonating the IRS (IR-2016-14). Many times, they disguise the number they are calling from so it appears to be the IRS or another agency calling, and they may threaten arrest, deportation, or license revocation. The scammers sometimes use IRS titles and fake badge numbers to appear legitimate and use the victim’s name, address, and other personal information, which makes the call sound official.

To protect themselves, the IRS says, taxpayers should be aware the IRS will never call to demand immediate payment, call about taxes owed without first having mailed a bill, call to demand payment without the opportunity to question or appeal, require use of a specific payment method, such as a prepaid debit card or wire transfer, ask for credit or debit card numbers over the phone, or threaten to bring in local police or other law enforcement to arrest a taxpayer for not paying.

3. Phishing

Another scam that continues to appear high on the list is “phishing,” in which taxpayers get unsolicited emails seeking financial or personal information. A taxpayer who receives a suspicious email should send it to phishing@irs.gov. “The IRS won’t send you an email about a bill or refund out of the blue,” said IRS Commissioner John Koskinen (IR-2016-15). Scam emails can also infect a computer with malware without the taxpayer’s knowing it, often enabling the criminals to access sensitive files or track keyboard strokes, exposing login information.

4. Return preparer fraud

Return preparer fraud involves “dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers” (IR-2016-16). The IRS warned taxpayers to be wary of “unscrupulous preparers who prey on unsuspecting taxpayers with outlandish promises of overly large refunds,” which is why the IRS says this scam makes it onto the list every year.

“Choose your tax return preparer carefully because you entrust them with your private financial information that needs to be protected,” Koskinen said. The IRS provides a number of tips for taxpayers to choose competent preparers, including checking what the preparer’s credentials are, making sure the preparer will be available after filing season, and ensuring that the taxpayer’s refund is deposited into the taxpayer’s account, not the preparer’s. The IRS recommends avoiding preparers who base their fees on a percentage of the refund or promise larger refunds than other preparers.

5. Hiding money or income offshore

Hiding money or income offshore, which is a major focus of IRS enforcement efforts, is the next tax scam the IRS addressed (IR-2016-17). “Our continued enforcement actions should discourage anyone from trying to illegally hide money and income offshore,” Koskinen said. As the IRS explained, there are legitimate reasons that taxpayers have foreign accounts, but these accounts trigger reporting requirements. The IRS offers a number of programs, including the Offshore Voluntary Disclosure Program, for taxpayers to come into compliance with these requirements. The IRS noted that the heightened reporting required under the Foreign Account Tax Compliance Act, which went into effect in 2015, makes it even harder for taxpayers to conceal assets overseas.

6. Inflated refund claims

Another scam that is closely related to return preparer fraud is inflated refund claims, in which unscrupulous preparers set up shop to lure unsuspecting taxpayers (IR-2016-18). “Be wary of tax preparers that tout outlandish refunds based on federal benefits or tax credits you’ve never heard of or weren’t eligible to claim in the past,” Koskinen said.

Inflated refund claims often involve claims for tax credits that taxpayers are not entitled to, such as education credits, the earned income tax credit (EITC), or the American opportunity tax credit. The IRS reminds taxpayers that they are responsible for what is on their return, even if someone else prepares it, and they can be assessed penalties and interest as well as additional tax.

7. Fake charities

Next on the list is fake charities. Taxpayers are cautioned to check the Exempt Organizations Select Check on the IRS’s website to determine whether a charity is bona fide and qualifies for deductible contributions (IR-2016-20). Legitimate charities should be willing to give donors their employer identification numbers, which can then be used to check whether the charities are qualified on the IRS website. Fake charities often use names similar to well-known organizations and may set up fake websites. They also can be used for identity theft purposes. When large-scale natural disasters occur, these fraudulent organizations tend to increase, the IRS reports, and it warns that taxpayers should not make any contributions without checking first.

8. Falsely padding deductions

No. 8 on the list is falsely padding deductions (IR-2016-21), which consists of deceitfully inflating deductions or expenses on the return to pay less tax or receive a bigger refund. This item is new to the dirty dozen list this year. The IRS warns taxpayers that they should “think twice” before overstating their charitable contribution expenses or padding their business expenses, as well as avoid claiming credits they are not entitled to, such as the EITC and the child tax credit. Taxpayers who do this may be subject to substantial penalties and may, in some cases, face criminal prosecution.

9. Excessive claims for business credits

The next item on the list, excessive claims for business credits, expands on last year’s “excessive claims for fuel credits” (IR-2016-22). This scam involves two specific false claims for credits: fraudulent claims for refunds of fuel excise tax and bogus claims for the research tax credit. The IRS says that its refund fraud filters are stopping a number of fraudulent fuel excise tax refunds this year.

10. Falsifying income to claim tax credits

Tenth on the list is falsifying income to claim tax credits (IR-2016-23). This usually involves falsely claiming higher earned income to qualify for the EITC, which is a refundable credit. Unscrupulous preparers often do this to get taxpayers larger refunds than they are entitled to. Even when taxpayers are unaware of these false claims, they are, as the IRS reminds again, responsible for what is on their tax return. They can be subject to significant penalties, interest, and possibly prosecution.

11. Abusive tax shelters

No. 11 is participating in abusive tax shelters (IR-2016-25). Abusive tax shelters are defined as schemes using multiple flowthrough entities to evade taxes. They often use limited liability companies, limited liability partnerships, international business companies, foreign financial accounts, offshore credit or debit cards, and multilayer transactions to conceal who owns the income or assets.

The IRS also mentions the misuse of trusts and captive insurance companies among the types of transactions taxpayers should avoid. As in some of the other scams, the IRS warns that participating in these transactions can result in significant penalties and interest and “possible criminal prosecution.” According to Koskinen, “These schemes can end up costing taxpayers more in back taxes, penalties, and interest than they saved in the first place.”

12. Frivolous tax arguments

The final “scam” is frivolous tax arguments, which the IRS warns taxpayers not to be talked into (IR-2016-27). Announcing the release today of the 2016 version of its webpage, “The Truth About Frivolous Tax Arguments,” the IRS explained how the courts and the IRS have treated these arguments, which involve claims such as that the only employees subject to income tax are employees of the federal government or that only foreign income is taxable. “Taxpayers should avoid unscrupulous promoters of false tax-avoidance arguments because taxpayers end up paying what they owe plus potential penalties and interest mandated by law,” Koskinen said. The IRS reminded taxpayers that they would automatically be subject to the $5,000 penalty for frivolous tax positions.

If you have any questions regarding this, please to not hesitate to contact Greg Gandy or Mike McDevitt at (719) 579-9090.

Renting out residential property can be a great investment considering real estate market trends and favorable tax rules. Being able to take advantage of many tax deductions, which are not available for other types of investments, could make it even more lucrative.  However, it can be stressful, challenging and involves additional financial obligations. Furthermore, there are a lot of tax rules that must be followed in order to report rental activity properly, and there are many deductions that can be overlooked.

So, what can you deduct?

Most know about deducting mortgage interest, insurance, property taxes, repairs and maintenance, association fees, utilities and so forth, but there is much more to be taken into account.

Interest

Besides mortgage interest, a landlord can deduct interest paid on other business related expenses, such as business loans taken to improve a rental property, car loan payments (but only the part used for business purposes), and the interest paid on credit cards used solely for business purposes.

Claim your home office

Sometimes we do not think about rental property as a regular business, but it is. If you have a room specifically dedicated for rental activities, you can deduct a portion of house expenses against rental income. A portion of deductible expenses can be calculated either by multiplying business percentage (the office’s square footage divided by the square footage of the entire house) by actual total expenses or using a standard rate allowed by the IRS: $5 per square foot with a maximum of 300 square feet.

Track your mileage and travel expenses

If you use personal vehicle for such rental activities as buying supplies, picking up rent or showing the property to potential renters, a portion of vehicle expenses is deductible. You can either deduct actual expenses based on business use percentage or apply standard mileage rate to total business miles driven during the year (there are some limitations on using standard mileage rate).

If you travel overnight for your rental activity, you can deduct airfare, hotel bills and meals. Remember to keep detailed and accurate records and supporting documentation to substantiate both automobile and travel expenses.

Improvement vs. repairs

Beware that the IRS makes a distinction between improvement and repairs. Repairs and maintenance expenses are considered work that is necessary to keep your property “in good working condition” and can be fully deducted in the year they are incurred. On the other hand, improvements to the rental property should be capitalized and depreciated over its useful life. However, depreciation of the cost of residential building can be a nice benefit sheltering some of your cash flow from taxes. Generally, for something to be considered depreciable, it has to make your property either bigger, add significant value to a property or increase its useful life.

To maximize repair deduction, you can try to fix and restore, if possible, instead of replacing. A replacement is almost always an improvement for tax deduction purposes. For example, if the roof is damaged, do not replace the whole roof, repair or replace only the damaged part. Repairs are usually much cheaper than replacements, however, consider the fact that sometimes it makes more economic sense to replace and you may be able to charge more rent for a unit with new appliances, carpets, etc.

Passive loss rules

Generally, owning rental property is considered a passive activity. In short, it means that losses incurred are limited against other types of income. Passive losses in excess of passive income are suspended until you either have more passive income or you sell the property that produced the losses. This means that rental property loss deductions can be postponed, sometimes for many years. There are certain exceptions to this rule. First, if you are considered a real estate professional, rental real estate activities are not considered passive. Second, if you are considered actively involved in your rental activity, you can deduct up to $25,000 in passive rental losses if you make under $100,000.

Self-Employment Tax and High Income Medicare Surtax

More good news; rental income is not subject to self-employment tax, which applies to most other unincorporated profit-making ventures. However, according to a provision in the health care legislation, rental income and gain from the sale of investment real estate can be subject to new 3.8% Medicare surtax on net investment income.

When you sell

When you sell a property you have owned for more than one year, the profit is generally treated as a long-term capital gain. As such, it will be taxed at favorable rates. However, part of the gain—an amount equal to the cumulative depreciation deductions claimed for the property—may be subject to recapture rules and higher tax rates. Remember that you may also owe state income tax on real estate gains.

You also have the option of selling appreciated real estate on the installment plan. Then, your taxable gain can be spread over several years. Further, suspended passive losses can be used to shelter gains from selling appreciated properties.

On the other hand, it is important to remember that rental property appreciation is not taxed until you actually sell. Good properties can generate the kind of tax-deferred growth that investors dream about. Finally, so-called “like-kind exchanges,” also known as “Section 1031 exchanges,” allow real estate owners to unload appreciated properties while deferring the federal income tax. In short, you exchange the property you want to dispose of for another property. If you adhere to the like-kind exchange rules, you are allowed to defer paying taxes until you sell the replacement property.

As you can see, tax rules for landlords can be very favorable, even though they can become somewhat complicated depending on an individual situation. Call BiggsKofford at (719) 579-9090 to decide what deductions are applicable to your specific situation.

Unfortunately, the tax credit for buying a hybrid car is gone. However, if you are ready to switch to a plug-in hybrid or electric car, you might be eligible for up to $7,500 in Federal and $6,000 in Colorado tax credits. This combination can reduce the cost of such models; however, there are several things to keep in mind.

Both credits can be confusing to understand, have recently changed and are very different in terms of the types of vehicles that qualify for the credit and other requirements. We will focus on qualified plug-in hybrids and electric cars only.

Not all electric vehicles and plug-ins qualify.

In order to qualify for the Federal credit, the vehicle must be a qualified vehicle (a buyer can generally rely on the manufacturer’s representation that the vehicle is eligible), comply with the legal definition of a motor vehicle as per the Clean Air Act, title II and have gross vehicle weight of less than 14,000 pounds. Moreover, the federal credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States. Be sure to check IRS website for qualified vehicles, credit amount and quarterly sales by manufacturer:

https://www.irs.gov/Businesses/Plug-In-Electric-Vehicle-Credit-IRC-30-and-IRC-30D.

In order to qualify for the Colorado credit, the vehicle must meet multiple criteria as well, including gross vehicle weight rating of 8,500 pounds or less, Colorado title and registration, maximum speed, etc. Be sure the vehicle meets all the criteria and check a list of makes and models that the department has already evaluated for credit eligibility: https://www.colorado.gov/pacific/sites/default/files/Income67.pdf. While Colorado does not cap the number of credits it awards, the credit is set to expire on January 1, 2022.

Credit amount varies.

The Federal credit depends on the size of the battery in the car. To qualify a vehicle must have a battery pack with a capacity of at least 4 kilowatt hours (kWh) and be capable of being recharged from external. Provided it meets all the other qualifications, the federal government allows a credit of $2,500, plus $417 for a vehicle that has a battery with at least 5 kWh of capacity, and then an additional $417 for each additional kWh up to $7,500.

The Colorado credit is calculated based upon the vehicle’s manufacturer’s suggested retail price or the cost of the used vehicle or the leased value of the vehicle and battery capacity or the conversion cost and an applicable percentage.

Use it or lose it?

The Federal incentive is a nonrefundable credit. While it reduces your tax liability dollar-for-dollar, it cannot reduce your tax balance beyond zero. No refunds or carry forwards are allowed. The Colorado credit is more generous and if the credit exceeds the tax due, it will be refunded.

Should you buy it new?

For the Federal credit, the vehicles must be acquired for use or lease to others and not for resale. Additionally, the original use of the vehicle must begin with you and the vehicle must be used predominantly in the United States. Therefore, you must buy a new vehicle and if you lease a vehicle, you cannot claim the credit. Do not forget that you must place the vehicle in service during the tax year to claim the credit.

On the other hand, the vehicle does not have to be new to qualify for the Colorado credit; leased vehicles may qualify as well. Used vehicles are eligible if they have never been registered in Colorado before.

As one can see, there are a lot of moving pieces. Further, special rules may apply to vehicles bought for business use, alternative fuel vehicle, etc. If you have questions regarding Federal and Colorado tax credits for plug-in hybrids and electric cars, we can run your numbers to estimate the benefit you might receive. Call us at 719-579-9090 or send us an email to info@biggskofford.com.

While warmer weather or more sunshine may be a big factor in picking a place to retire, considering state taxes on retirement benefits and other financial factors are significant steps in making such a major decision. Tax treatment of retirement benefits varies widely from state to state. For example, some states exempt all pension or Social Security income, others provide only partial exemption or credits and some tax all retirement income.

Colorado is one of the states that allows a pension/annuity subtraction for taxpayers who are at least 55 years of age and beneficiaries of any age who are receiving a pension or annuity because of the death of the person who earned the pension.

Amount of Subtraction

Qualified taxpayers who are under age 65 can subtract up to $20,000 of the taxable pension income. And taxpayers who are 65 years of age or older can subtract up to $24,000 of the taxable pension income.

If each spouse receives income from a pension or annuity, then each spouse must qualify by age to claim the pension subtraction for their own pension or annuity. Each spouse’s subtraction is computed separately and no part of one spouse’s subtraction may be claimed by the other. However, when a married couple receives Social Security benefits and they file a joint income tax return, Colorado law requires that they prorate the benefits between them.

Qualifying Income

To qualify for the subtraction, a payment must be:

• pension or annuity income that is not considered a premature distribution, and
• reported on the federal return as taxable IRA distributions, pension and annuities, or Social Security benefits , or reported as a lump sum distribution on the Colorado Form 104.

This includes the following:

• a retirement benefit;
• a lump sum distribution from a pension or profit sharing plan to the extent such distribution qualifies for the federal tax averaging computation;
• a distribution from an individual retirement arrangement or a self-employed retirement account;
• amounts received from a privately purchased annuity;
• Social Security benefits.

It is important to remember that premature distributions, regardless of the source, do not qualify for the subtraction. And only the portion of the taxable pension or annuity income that is included in federal taxable income qualifies for the subtraction.

Special rules may apply to 457 plan benefits, disability retirement, nonqualified deferred compensation, PERA and DPS benefits, IRA rollovers and trusts/estates. If you have questions regarding Colorado pension subtraction, BiggsKofford is here to help. Call us at 719-579-9090 or send us an email to info@biggskofford.com.

In 2015, the federal estate tax exemption is $5.43 million. With little planning, a married couple can pass up to $10.86 million worth of assets to heirs, so no estate tax will go to the IRS. Those numbers will increase in the future with inflation.

With such a large exemption, you may think that estate tax planning is unnecessary. However, nearly half of all states have an estate tax (paid by the decedent’s estate) or an inheritance tax (paid by the heirs) or both. The tax rate goes up to 16% in many states, or even higher in some.

What’s more, state estate tax exemptions tend to be lower than the federal exemption; in some states, there is virtually no exemption for certain estates. Therefore, you may find year-end estate tax planning to be worthwhile, even if you don’t anticipate having an estate over $5 million or $10 million.

Employing the exclusion

In terms of year-end planning, anyone with estate tax planning concerns (federal or state) should consider year-end gifts that use the annual gift tax exclusion, which is $14,000 in 2015. That is, you can give up to $14,000 worth of assets to any number of recipients, with no tax consequences. You don’t even have to file a gift tax return.

Married couples can give up to $28,000 per recipient, from a joint account, or $14,000 apiece from individual holdings. Larger gifts probably won’t be taxed because of a generous lifetime gift tax exemption, but you’ll be required to file a gift tax return and there could be future tax consequences.

Example: Walt and Vera Thomas have two children. In 2015, Walt can give $14,000 worth of assets to their son Rick and $14,000 to their daughter Ava. Vera can do the same, moving a total of $56,000 from their taxable estate.

Similar gifts might be made to parents you’re helping to support. As explained previously in this issue, giving appreciated stocks and stock funds to loved ones may be an effective way to reduce exposure to any market retreat.

Whatever your purpose, keep in mind that there is no spillover from one year to the next. If you miss making $14,000 annual exclusion gifts in 2015, you can’t double up with a $28,000 exclusion gift in 2016. Moreover, make sure that gifts are completed—checks must be cashed—by December 31. Therefore, you should put your plans for year-end gifts in motion well before year end.

Another approach to reducing stock market exposure without incurring steep tax bills involves year-end gifts to family members. One way to use gifts in family tax planning is to transfer assets to youngsters such as your children or grandchildren. In 2015, the annual gift tax exclusion is $14,000. (See the article, “Year-End Estate Tax Planning,” for more details.)

Example: Gil and Karen Martin, who have three children, own stock funds that have appreciated sharply since the purchase dates several years ago. In late 2015, Gil gives $14,000 worth of stock funds to their son Nick, $14,000 of those shares to their daughter Patti, and $14,000 to their daughter Renee. Karen does the same. Thus, the Martins have reduced their stock market exposure by a total of $84,000 (six $14,000 gifts) without owing any tax and without having to file gift tax returns.

After such a gift, the recipient retains the asset’s basis (cost, for tax purposes) and holding period. Assume here that each $14,000 gift has an $8,000 basis, reflecting what Gil and Karen paid for the fund shares. Each child receives $28,000 of fund shares and would have a $12,000 long-term gain on an immediate sale of those shares.

Kiddie stuff

Depending on the age of the children and their school status, the so-called “kiddie tax” rules might come into play. Those rules are complex, but the youngsters to whom they apply include full-time students under age 24. For tax code kiddies, any unearned income over $2,100 this year would be taxed at the parents’ rate. Thus, there would be little tax advantage for such gift recipients to sell the shares immediately.

On the other hand, children who have finished their education or reached age 24 generally are past the kiddie tax years. If so, they might sell the shares and owe 0% tax on all or part of the gains. Long-term capital gains are tax-free as long as taxable income is no more than $37,450 on a single tax return in 2015, or $74,900 on a joint return.

By the same logic, if Nick Martin is a 22-year-old student now, he can hold the appreciated shares until he finishes school or reaches age 24. At that point, Nick may be able to use the 0% tax rate on a profitable sale.

Alternatively, if the Martin children are very young, they could simply hold on to the gifted shares, as well as any shares they receive in future years. With their long-time horizon, the youngsters might be able to ride out market volatility, see the shares appreciate in the future, and take 0% gains at some point.

In any case, the Martins will have reduced their stock market exposure without owing tax, and they’ll have helped their children build a college fund, pay off student debt, buy a home, or find another use for the transferred shares.

Senior strategies

Instead of (or in addition to) gifts to children, appreciated shares can be given to retired parents who might have modest taxable income. This plan can be especially attractive for taxpayers helping to support elderly relatives.

Example 2: Assume that the Martins are providing financial help to Gil’s parents, who are living on a modest fixed income. Gil and Karen could each give $14,000 of appreciated stock fund shares to Gil’s mother and $14,000 of such shares to Gil’s father by year-end 2015, for a total of $56,000. If those funds pay dividends, the senior Martins could hold onto the shares and probably owe 0% on the dividend income. The same 0% tax rules for long-term capital gains also apply to qualified dividends.

Alternatively, Gil’s parents could sell the gifted shares. Assuming the same basis as in example 1 ($8,000 per $14,000 of shares), their taxable gain would be $24,000, some or all of which could be taxed at 0%. The money could be used for retirement living expenses. With either the “sell” or the “retain” strategy, assets not depleted by his parents eventually could be inherited by Gil, perhaps with a basis step-up that would reduce tax on an eventual sale.

Again, Gil and Karen could help Gil’s parents while reducing their exposure to a stock market retreat, yet owe no tax. Keep in mind that any late 2015 gifts can be repeated as early as January 2016, sheltered by next year’s gift tax exclusion.