- Well-intentioned parents and grandparents can be misled by the gift tax rules.
- Understand the tax obligation you are transferring when gifting appreciated assets. The recipient of the gift will need to report the gain on the sale of an appreciated asset and may need to pay tax if applicable.
- Always check with your advisor before making any substantial financial gifts.
Gifting to your heirs, while you are still alive, can be a great way to manage estate taxes down the road, with an added benefit of watching your loved ones enjoy the gift. Make sure you follow the current gift tax rules as you don’t want to be the recipient (or cause) of an unexpected tax hit.
Three Misconceptions About Gifting
1. Gift recipients must pay taxes on gifts since they are considered income.
The person receiving the gift (i.e. beneficiary) does not have to report the gift to the IRS or pay any taxes on the gift. However, the person giving the gift (i.e. donor) does have to report the gift if it’s over the $15,000 annual exclusion amount.
2. Gifts are limited to $15,000 per year.
You are welcome to gift more than $15,000 in a year to an individual, but that amount must be reported to the IRS via Form 709. Also, if the gift exceeds the $15,000 limit, it will count against your $11.2 million lifetime federal exemption for individuals.
The scenario is a bit different for couples who are married. A husband and wife could give their son and daughter-in-law $30,000 each ($15,000 from the husband and $15,000 from the wife) for a grand total of $60,000 gifted to the couple in one year with no tax filing requirements. The gift would not count against the $22.4 million lifetime exemption for married couples because the gifts do not exceed the $15,000 limit per person. Until you reach the lifetime federal exemption limit, there are no gift taxes due.
You can also gift more than the $15,000 annual limit and not have it count against your $11.2 million lifetime dollar cap, if you pay for the recipient’s (i.e. beneficiary’s) medical care or education and pay directly to the beneficiary’s institution. It is very important that you make the gift directly to the school/hospital, and not to the student or patient in order to avoid potential excess gifting.
3. $10,000 in stock is worth $10,000.
This is not true when gifting. The basis or purchase price follows the gift, whereas the cash value gifted remains the same cash value. The recipient of an appreciated gift (e.g. stock) will need to report the gain when they sell the asset and then pay tax, if applicable.
EXAMPLE: Suppose you have two nephews completing high school and you want to give each of them $1,000 as a graduation present. You give one nephew $1,000 in cash and you give the other nephew $1,000 in stock that you purchased years ago, for $100. The nephew who received cash gets the full $1,000 free and clear. However, the nephew who received the stock may be required to sell the stock because he needs the cash for school. Thus, there will be a $900 capital gain on the sale of the appreciated stock. This gain may be taxable and/or trigger the “kiddie tax” which results in added complexity and potential tax consequences for the recipient.
NOTE: Your nephew’s tax situation may allow for lower taxes, but it is important to understand how the gift might be used and if the asset you are gifting (cash, stock, real estate) is what your nephew really needs.
Intergenerational gifting is one of the most powerful ways for families to support each other financially and emotionally. We encourage you to connect with your advisor before making financial gifts of significant size. Tax rules are complicated and the repercussions can be painful if details are missed.
John D’Amelio is an Advisor at Soundmark Wealth Management, LLC. John specializes in helping clients find cost-effective ways to invest and take control of their financial futures.