Napolitano looks at gifts.
One of the common questions this time of year is “How much can I gift to family members without tax consequences”? It’s certainly a loaded question, and the answer is, it depends. Let me explain.
The federal annual gift limit is $15,000 per donor to anyone. For a married couple, they can gift $30,000 to any one person. As long as that gift is cash, there are no income tax consequences. The recipients can do whatever they want with that cash and have no tax consequences from the receipt of that gift.
If you want that gift to be larger, there are strategies. Given that we’re late in the year, you can write one check now and a second one on January 1 of the New Year. This now gets you $60,000 to any one recipient. If that recipient is married, you can include your in-law in that gifting chain and increase your gift up to $120,000 in short order.
The next way to boost your large year end gift is by using some or all of your federal estate tax exemption - which is currently at $11.4 million per person, and rising to $11.58 million a head in 2020. So if you want to gift an asset worth $1 million, file a gift tax return to show that you’re using up $1 million of your $11.4 million. This is pretty simple to do.
But “don’t try this at home” without professional guidance. You have issues such as valuation, titling such a valuable asset and state consequences to deal with. In my home state of Massachusetts, there are no gift limits, but not all states are similar.
Gifts of assets are a little tricky. First you have to deal with a valuation. The gift is accounted for at its fair market value or FMV. This figure isn’t always easy to resolve and may require a formal valuation. Don’t be cheap, large gifts are often examined by the Internal Revenue Service, so don’t skip on a good valuation.
If the gift is other than cash such as an investment, a share of a family business or real estate investment, there are some tax issues. The donor and the recipient would suffer no income or gift tax consequences as a result of the gift.
The twist is the basis, or tax cost in the hands of the recipient. The new owners tax cost is the exact same as the donor’s tax basis. This is called a carryover basis. When the asset is ultimately sold, the recipient may incur capital gains taxes to the extent that there is a gain over the carryover basis that you’ve received. The toughest to calculate are long term real estate holdings and large stock positions acquired over decades of investing.
Figuring out basis on a gifted asset can be challenging. If you have received such gifts, I would begin calculating that basis sooner than later.