Do I pay taxes on a gift of mutual funds?

My parents, saving for college many (20+?) years ago, purchased some Evergreen mutual funds for each of their children. I believe the accounts were established in the children’s names.

Thanks to some scholarships and working for the school, I graduated with about $3500 left in that account.

Fast forward to 2013–the account has increased in value (through dividend reinvestment and appreciation) to about $6500.

Do I pay taxes on this gift of mutual funds?

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2 Responses to “Do I pay taxes on a gift of mutual funds?”

  1. First of all, in the U.S., no Federal gift tax has to be paid by the recipient of
    the gift; it is the donor who has to pay gift tax, if any is due. Nor does the
    recipient have to pay Federal income tax on the gift; it is not considered
    taxable income. I do not believe that any states view matters differently for
    the purposes of state gift and income taxes, but I am always ready to be
    disabused of any such fondly-held notions.

    If your parents were required to pay any gift tax, that would have been at the
    time the gift was originally given and only if they gifted more than the maximum
    allowable exemption per person for that year. Currently the exemption is $14K
    from each donor per recipient per year. Additional gifts were made by your
    parents to you during your minority when your parents paid any income tax
    due on the distributions in your account, but these amounts would unlikely to have been larger than the exemption for that year. In any case, gift tax is
    none of your concern.

    If you have been declaring the income from distributions from the mutual
    funds all these years, then the only tax due on the distributions
    from the funds in 2013 is the Federal income
    tax for the 2013 tax year (plus a special assessment of Medicare tax
    on investment income if your income is large; unlikely based on your
    question and follow-up comment). If you sold all or part
    of your shares in the funds in 2013,
    then you would need to calculate the basis of your investments in the
    fund in order to figure out if you have capital gains or losses. Ditto
    if you are thinking of cashing out in 2014 and wish to estimate how much
    income tax is due. But if you want to just hang on to the funds, then
    there is no immediate need to figure out the basis right away, though
    taking care of the matter and keeping in top of things for the future
    will be helpful.

    As a final note, there is no tax due on the appreciation of the fund’s
    shares. The increased value of your account because the fund’s share
    price rose is not a taxable event (nor are decreases in the account
    deductible).
    These are called unrealized capital gains (or losses) and you do not pay tax
    on them (or deduct them as losses) until you realize the gains by
    disposing of the property.

  2. I gift my daughter stock worth $1000. No tax issue. She sells it for $2000, and has a taxable gain of $1000 that shows up on her return.

    Yes, you need to find out the date of the gift, as that is the date you value the fund for cost basis. The $3500 isn’t a concern, as the gift seems to have been given well before that. It’s a long term capital gain when you sell it.

    And, in a delightfully annoying aspect of our code, the dividends get added to basis each year, as you were paying tax on the dividend whether or not you actually received it. Depending on the level of dividends, your basis may very well be as high as the $6500 current value.

    (pls ask if anything here needs clarification)