Will my parents have to pay tax on stock I gave them?

December 8, 2003

From:  Raju
Date:  Fri, 10 Oct 2003

Hi,

I have a question on the capital gain on a gifted stock for a non-US resident.

I am planning to gift my father and mother some stock (worth $22,000 to both of them so that I do not have to pay any gift tax).

When my parents sell this stock, are they liable for paying any taxes to the IRS? Does the online broker withhold any taxes from the sale?

My parents are Indian Nationals and they come to the USA on visitor visas. Last year, we claimed them as our dependents on our tax return and we will do the same this year too (as they meet substantial presence criteria).

Thanks,
Raju

Answer

Date:  31 Oct 2003

Hello Raju,

The first question is whether your parents are actually residents of the United States. Based on what you have told me, it doesn't appear so unless they have made an election to be taxed as U.S. residents.

If your parents are not taxed as U.S. residents, you may not claim a dependent deduction for them.

If they are non-residents, the sale of stock results in income from intangible assets, taxable in the country of residence (India).

If they are taxable as U.S. residents, the gain will be taxable in the United States. The income could disqualify them for the dependent deduction on your income tax return for the year of sale.

It appears to me that no federal income tax withholding is required for the sale of securities by a nonresident alien. You can confirm this with your stock broker.

Note that different rules apply for estate tax. If your parents own the stock of a U.S. company at their death and they are not U.S. residents, the stock will still be subject to U.S. estate tax.

There could also be tax issues for India and foreign tax credits involved if any income is double-taxed.

These rules are very complex and I'm not an expert in this area, so I recommend that you hire and consult with a tax consultant who is familiar with these rules before going ahead.

Good luck!
Mike Gray

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