Quote of the Week

“Use it up, wear it out, make due, or live without.” – repeated to us by a dear friend and client, Mary Jane

Tech Corner

The big news last week was the jobs report. The US job market added only 266,000 jobs in April, falling really far short of expectations of one million new jobs. March’s gain of more than 900,000 new jobs was revised down to 770,000. It appears that the recovery isn’t as strong as previously thought. Some blame the fact that why would people go back to work if their benefits for staying home are almost as good, or in some cases even greater than going back to work. Why go back to a job that doesn’t pay as much as the unemployment benefits, plus be exposed to the virus?

In my view, the people who have actually gone back to work will probably have a “leg up” on the best jobs vs. those who are staying home. But, unfortunately, some people just think in the short-term. We shall see who is smarter when the excess unemployment insurance from the Federal Government runs out.

The trend in the markets is back towards the companies that didn’t participate in the tech rally vs the high earnings multiple “stay at home companies” is still playing out. The evidence is in the performance of the indexes from last week. The Dow was up +2.67%, the S&P 500 was up +1.22% and the Nasdaq was down -1.51%.

We have moved our portfolios to take advantage of the trend.

I am still encouraged for the markets and commodities as of now. We are still in a deep Quad II which is good for the stock market and commodities.

Sue’s Thoughts

By this time next week, I will be visiting with my two youngest grandchildren for the first time in fifteen months.  Saying I am excited would be an extreme understatement. This is also the first time they will come to visit Nana and Poppa at our house, so toddler proofing has taken up a lot of time planning and executing.  With all these thoughts of grandkids, the following article caught my attention.

Gifting for Education Savings

What is it?

A gift is a voluntary transfer of money or property from one person to another person or entity (such as a trust) where the person making the gift receives either nothing or a lesser amount of money or property in return. In the context of education planning, gifting is usually implemented as a strategy when parents want to shift income to their child and reduce taxes. This ability to shift income and reduce taxes works best when the parents are in a high tax bracket and the child is in a low tax bracket.

Caution: The kiddie tax rules may make gifting to children less effective as a college savings strategy.

Shifts income to lower tax bracket

The primary advantage of gifting assets to your child is that, in most cases, children are in a lower tax bracket than their parents. So over time, the money will likely grow to be worth more in the child’s account because the child generally pays income and/or capital gains tax at a lower rate. However, the kiddie tax rules may negate this advantage when the child’s annual unearned income is below a certain amount, as discussed below.

Child retains parents’ cost basis in gifted asset

When you gift an asset to your child that has appreciated in value, such as appreciated stock, your child’s basis (cost) in that asset is considered to be the same as your original cost, not the current value of the property. This means that upon sale of the asset, your child will have the same amount of capital gain that you would have had. The difference is that your child may owe less capital gains taxes if he or she is in a lower tax bracket.

Capital gains tax rates are lower for lower-income individuals

Individuals with little to no taxable income generally pay zero capital gains tax on most long-term capital gains. If you gift appreciated assets to your child, your child will have the same basis and holding period in the assets that you had. If you are in a higher income tax bracket than your child, then your child will have some tax savings when the asset is sold compared to if you had sold the asset.

Reduces size of gross estate

When you gift assets to your child, you generally remove those assets from your gross estate. Thus, you reduce the chance your estate will owe estate tax.

The kiddie tax may limit your tax savings

Earnings, interest, and capital gains earned by your child are taxed to your child each year under special “kiddie tax” rules that apply when a child has unearned (passive) income. Under the kiddie tax rules, a child’s unearned income over a certain threshold ($2,200 in 2021) is taxed at parent income tax rates. The kiddie tax rules generally apply to children under age 18 and full-time college students under age 24 whose earned income doesn’t exceed one-half of their support.

Tip: To minimize the impact of the kiddie tax, parents might consider investing their child’s savings in tax-free or tax-deferred investments so that any taxable income is postponed until after the child reaches age 24 (when the child is taxed at his or her own rate). Such investments can include US savings bonds, tax-free municipal bonds, or growth stocks (which provide little, if any, current income). Alternatively, parents can try to hold just enough assets in their child’s name so that the investment income remains under $2,200.

Transferring assets to child may reduce his or her financial aid award

Under the federal methodology for determining a family’s financial need, a child’s assets can have a greater financial aid impact than his or her parents. Under this formula, a child is expected to contribute 20 percent of his or her assets each year toward college costs, compared to 5.6 percent for parents. So $20,000 in a child’s bank account would translate into a $4,000 expected contribution, whereas the same money in the parents’ account would mean a $1,120 expected contribution.

Gifting assets to your child is irrevocable

Once you gift an asset to your child, your child owns it. That means that your child can use the money for anything, not necessarily college.

Possible gift tax implications

If the sum of the gifts you make to your child each year is equal to or less than the $15,000 annual gift tax exclusion or double that amount for married couples who are US citizens and making joint gifts, the gifts are not subject to federal gift tax (though they may be subject to state gift tax). However, if gifts to your child are over the annual gift tax exclusion amount in a given year, a portion of the gifts may be subject to federal gift tax.

What are the most favorable types of property to gift to your child?

There’s no restriction on the type of property that can be gifted to your child; parents are free to gift any asset they wish. However, some types of assets are more favorable to gift than others due to the tax-saving opportunities. Two of these assets are discussed here: appreciated assets and income-producing property.

Appreciated assets

An appreciated asset is an asset that has a value in excess of the holder’s adjusted tax basis in the asset. Though everyone certainly hopes their assets will appreciate in value, the downside is the capital gains taxes that could result from the sale of such assets.

The strength of gifting an appreciated asset to your child is that if and when your child sells the asset, he or she will be subject to tax on any gains at his or her own rate.

Income-producing property

Income-producing property is just what the name suggests–it’s property that produces income. Examples of such property include rental property, stocks that pay regular dividends, bonds that pay interest, and equipment leases. The strength of gifting income-producing property to your child is that, in most cases, you transfer the income stream to someone in a lower tax bracket than yourself.

Questions & Answers
Is it true that a person can make a tax-free gift of tuition on behalf of a child?

Yes. A tax-free gifts of tuition is a payment of tuition made directly to a college or university on behalf of a student for his or her education. The IRS won’t consider this type of payment to be a gift for purposes of computing federal gift tax. In other words, you can make a gift of tuition for more than the annual gift tax exclusion in a given year, without federal gift tax consequences.

To qualify, the payment must be for tuition only and made directly to the college. You can’t gift the money to the child and then instruct the child to apply the money toward tuition. The gift of tuition must occur at the time your child is actually in college.

Copyright 2021 Broadridge Investor Communication Solutions, Inc

If you have friends or family in need of financial life planning services,

It would be the honor of Laurence Lof Financial Advisors to assist them.

We value your referrals!

These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.

The S&P 500 index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.

Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Laurence Lof Financial Advisors, LLC are not affiliated. Laurence Lof Financial Advisors 4757 E Camp Lowell Drive Tucson AZ 85712

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