Are you considering making gifts to loved ones or charities? Before you pull out cash to make a gift, consider gifting other assets such as stock and real estate or holding onto those assets and bequeathing them through your estate.
There are many options for gifting assets to either loved ones or charities. However, drastically different tax consequences for both the donor and the donee can arise depending on the timing of the gift and the type of gift.
The simplest and most common gift is cash. There is an annual gift tax exclusion of $15,000 per recipient in 2019 ($30,000 for married couples). If your total gifts for the year to one individual exceeds the annual exclusion amount, then a gift tax return must be filed with the IRS. Chances are, even if you need to file a gift return, you will likely not have to pay tax on the gift. In 2019, an individual can gift up to $11.4 million during their lifetime before being subject to gift tax – effectively $22.8 million for married couples.
Gifting Other Assets
If you gift appreciated assets to another person while you are alive, the amount of the gift is considered to be the fair market value of the asset at the date that you gift it. However, your tax basis in the asset carries over to the donee. Meaning, if the recipient sells the asset immediately, they will have the same taxable gain as the donor. If the asset has a high potential for appreciation, the benefit is that the donor has effectively removed the highly appreciated asset from their estate and, thus, not subject that asset to estate tax.
However, if you gift assets that have decreased in value since you acquired them, then the recipient’s basis will be the fair market value on the date they receive it. This means they will be unable to take a loss if they sell the asset upon receipt. Therefore, when gifting a depreciated asset, it is more beneficial to sell it, receive the taxable loss at the donor level, and gift the cash.
Gifting to Charities
A gift to a charity allows the donor to receive a charitable income tax deduction in the year of the donation. The amount of the deduction depends on what you give and what type of charitable organization receives it. If donating non-cash assets to a public charity, you can take a deduction for the contribution of up to 30% of your adjusted gross income (AGI) for that year. If donating non-cash assets to a private foundation, the limit is 20% of your AGI. Any deduction that you cannot use in the year of the donation because of an AGI limitation will carry forward for the next five years. Different AGI limitations exist for cash donations.
Donating highly appreciated assets to a charitable organization may be beneficial because the donor can generally take an income tax deduction for the fair market value of the asset on the gift date and, additionally, the donor will not need to recognize a large capital gain upon disposition.
Gifting as Part of Your Estate
Upon your death, all assets in your estate will receive a “step-up” in basis. This means that the cost basis of all assets for income tax purposes is equal to the fair market value on your date of death. Therefore, if your heirs were to sell the asset immediately when they receive it, they will pay no income tax on the sale. If the value of your estate is under the estate tax exemption amount in the year of your death, bequeathing your assets to your heirs at your death may be a great planning tool to minimizing the overall tax burden.
You can also leave assets to charities when you die. Your estate will receive an estate tax deduction for the fair market value of those assets. However, if the value of your estate is less than the lifetime exemption amount, no estate tax will be paid regardless. Therefore, no estate tax benefit is realized by making this gift through your estate. In this case, it is more advantageous to gift assets to charity during your lifetime so that you can receive the income tax benefit.
With all of these factors to consider, the gifting process can sometimes be more complicated than it appears. If you have questions on consequences that could arise from a gift you are contemplating, please do not hesitate to contact our office at (858) 558-9200.