For 2012, the federal income tax rate on long-term capital gains and qualified dividends is 0% for taxpayers in the 10% to 15% federal income tax rate brackets. This applies to you if your taxable income (including long-term capital gains and qualified dividends) does not exceed $70,700 if you are married and filing jointly ($35,350 if you are single).
If your income is too high to benefit from the 0% rate, you may consider giving a child or grandchild some appreciated stock or mutual fund shares. If they are in one of the bottom two brackets, they can then sell and pay 0% tax on the long-term gains. Your ownership period plus the gift recipient’s ownership period (before he or she sells) must equal at least a year and a day to be considered “long-term”.
Another tax advantage is giving away stocks that pay dividends. The dividends will be federal-income-tax-free as long as the dividends fall within the recipient’s 10% or 15% rate bracket. If the Bush tax cuts are allowed to expire on December 31st, the minimum tax rate on the 2013 long-term gains for these taxpayers will be 8%-10%, while the minimum rate on 2013 dividends will be 15%.
There are two important caveats…First, if you give securities to someone under 24 years old, the Kiddie Tax rules may cause some of the resulting capital gains and dividends to be taxed at the parent’s higher rates. Second, if you give away assets worth over $13,000 during 2012 to an individual gift recipient, it will generally reduce your $5.12 million unified federal gift and estate tax exemption. Nonetheless, you and your spouse can jointly gift up to $26,000 without reducing your exemptions.