Gifting - Tax Implications
The person who receives a gift does not pay tax because of receiving the gift. If they receive cash, it is theirs to do with as they please without any tax considerations. However, if they receive something other than cash, which they later sell, they will have taxable income, if the sales price is greater than the basis of the item they received. Also, a person may not claim a gift to another person as a charitable contribution.
The valuation of a gift for gift tax purposes is its fair market value (FMV) at the date of the gift. However, for income tax purposes, the new basis depends on two factors:
1) If the FMV of the gift is greater than the donor's adjusted basis (appreciated), then use the donor's adjusted basis (called carryover basis).
2) If the FMV of the gift is less than the donor's adjusted basis (loss on property), then the loss is determined by the lesser of the date of gift value or the original basis.
If the FMV on the date of the gift is less than the donor's adjusted basis in the gift, then the following are true.
- A loss is measured using the FMV on the date of gift.
- A gain is measured using the donor's basis.
- If the sale price of the gift is between the donor's basis and the FMV on the date of the gift, no gain or loss is recognized.
Example: Your uncle purchases a property for $1,200,000. A few years later, when property values have declined, he gifts it to you for $660,000. If you sell the property two years later for $600,000, what happens?
1) The value of the gift is still the FMV date of gift, $646,000 ($660,000 - $14,000 exclusion).
2) The loss is determined by the lesser of the date of gift FMV ($660,000) or the substituted basis ($1,200,000), which results in a loss of $60,000 long term capital loss. See below.
|Uncle\'s substituted basis||$1,200,000 (+GAIN)|
|Between $660,000 and $1,200,000||No gain or loss.|
|FMV date of gift||$660,000 (-LOSS)|
The basis of property acquired by inheritance is the FMV on the date of the decedent's death or the alternate valuation date is so elected.
An annual gift tax return, IRS Form 709, is required for any year in which over $14,000 (2014) is given to any one recipient by any one donor. The tax return is due by April 15 on the year after the gift was made. No tax is due unless the $5,340,000 (2014) annual exclusion amount for gift tax purposes has been fully utilized by the donor. In addition, the spouse of the donor of the gift may sign the tax return to elect to have one-half of the gifts treated as having been made by the spouse. In this manner, the taxpayer may make use of the spouse's annual exclusion.
If you make a larger gift to a 529 plan for college expenses, you may make an election on the gift tax return to treat the gift as being made over a five-year period. For example, if you made a $70,000 transfer and made the election, you will be treated as making a $14,000 annual exclusion gift for a five-year period, and you will not need to use any portion of the annual exclusion amount for gift tax purposes.
In calculating the estate tax due on an estate, follow the basic formula below. Keep in mind that gift taxes paid on any gifts within three years of death are added to the decedent's gross estate.
|↓||Less expenses, admin expenses, debts, taxes, and casualty losses|
|Adjusted Gross Estate|
|↓||Less marital deduction and charitable deduction|
|↓||Plus taxable gifts|
|↓||Times tax rate|
|↓||Less applicable credit and gift taxes paid|
|Net Estate Tax|
Gift Tax Filing Requirements