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By John W. Schoen Senior Producer
msnbc.com

Q: I have stock that I purchased to help pay for my children's college education. The stock has appreciated over the years so that if I sold it now, I would owe capital gains tax on the sale.  Am I permitted to give the shares of stock to my children, who can then sell the shares to fund their college expenses and avoid capital gains tax? —John N., Harrisburg, Pa.

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A: Congratulations! You've figured out one of the last — and least publicized — “tax shelters” out there for ordinary, middle-income folks trying to send their kids to college.

You can't avoid capital gains altogether. But by giving appreciated stock to your kids, they'll pay at the lowest rate (5 percent.) And you need to keep a few things in mind:

You can only give $11,000 in stock to each child without incurring the “gift tax.”  Your spouse can also give $11,000 — so each child can get $22,000 — but make sure to transfer the stock to your wife first if it's not already a joint account.

The stock needs to be transferred to an account in your child's name, and then sold. (The IRS would take a dim view of doing this with a custodial account for children under 18, which you still legally control.) You'll still have to use the original price you paid as the "cost basis" for figuring the gain.

Once you do this, of course, the money legally belongs to them. If they decide to cash out those stocks and backpack through Peru, there's nothing you can do. One way around this is to set up an account in their name and then have them give you full trading authority. That allows you to transfer stocks, sell them and write the check against the proceeds to the school on your own.

Finally, if your child has significant income from a summer job or part-time job at school, the combined income could push your child into a higher bracket. But even if it does, you'll only pay higher tax on the portion subject to the higher bracket.

And have fun writing those tuition checks!

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