It turns out that there are a lot of things to consider before you make a gift.
Under current law, you can give up to $15,000 per person per year without having to report the gift or pay a gift tax. This is known as a gift tax “exclusion.” This amount is indexed for inflation, so it will eventually rise. The exclusion was $13,000 in 2009, then it increased to $14,000 in 2014, and to $15,000 in 2018.
If you give over $15,000 to a person in any one year, then you have to file a federal gift tax return; however, you may not owe a gift tax. That is because you have a lifetime gift tax “exemption.” Your lifetime gift tax exemption is combined with your estate tax exemption. The 2018 unified tax exemption amount is $11.2 million.
That is a lot of money that you can gift away, tax-free. But an unwise gift could end up having a big income tax disadvantage.
That’s because you need to consider the basis of your gift. Here is a quick example: If you bought stock for $5, that is your basis. If you sell the stock for $50, then you have to pay taxes on the difference between your basis and the sales price, resulting in a $45 capital gain.
If you give the stock away, your basis of $5 carries over to the recipient. The recipient will have the same capital gain concerns when the stock is sold.
However, there is a different result if you hold the stock until you die. Under current law, your heirs will receive a “step-up” in basis on the stock equal to the fair market value at the time of your death. That means that if the stock is worth $50 at the time you die, then your heirs will receive the stock with a $50 basis. If they then sell the stock for $50, there is no capital gain.
Taxes aside, there are other important considerations to gifting.
First, you need to decide if you truly want to give up control of the gifted property. For a gift to be completed, you must transfer it to the recipient voluntarily and without any type of payment.
Next, if you are willing to give up control, you must also decide if you want the recipient to have unrestricted use and control of the gift. Say, for example, that you are gifting $100,000 in cash to your son. If your son used the money for a political donation or a religious contribution, would that be acceptable to you? Are you concerned that your son may lose motivation to work?
Finally, if the recipient is a minor or is receiving governmental assistance, you should be cautious when structuring the gift.
Think before you gift.
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The information contained in this article is general information only and does not constitute legal advice. ©2018