Gifts to individuals in general that are less than $14,000 do not have to be reported to the IRS. Gifts in excess of that amount must be reported through a gift tax return.
Gifts can be in cash, individual securities, real estate, business interests or the free or reduced payment of rent or other benefits provided to someone. It is not limited to just cash gifts.
Gifts of assets that are not cash may be subject to capital gains or income tax. Think of it this way: if you were to sell the asset (instead of gifting it) and you would have to pay tax on the sale; then the person who receives the would have to pay a similar tax when that person later sells it.
- You purchased 100 shares of a stock and paid $1,000 for it (your income tax “basis”).
- The value of that stock grows in value to $20,000 at which time you make a gift to a family member.
- That person sells the stock.
- This gift triggers a gift tax return that you must file for the $6,000 which exceeded the annual exclusion amount.
- The person selling the stock has to report a capital gain of $19,000 and pay tax on the sale.
The tax planning issues involved with gifts of low basis assets include the following:
- Is the amount of income tax paid when the gift recipient sells the asset equal to or greater than the amount of estate tax that would be paid if the person received the assets are an inheritance? Assets inherited get a “step-up” in basis equal to the fair market value of the asset as of the date of death of the grantor of the gift?
- Will the value of the asset grow over time so that the increased value at death would be greater than the income tax to be paid?
- Will the recipient sell the asset or instead hold the asset until the death of the recipient (thereby getting a fresh step-up in basis at that later date? This is often referred to as an “estate freeze”?