Tax implications on gifts

One issue that many individuals forget about when they approach the idea of gifting is the issue surrounding possible taxes.  Most Americans are aware that each person may gift up to $13,000 annually to anyone they choose without the need to file a gift tax return.  Many Americans are also aware that, under the 2012 laws, when they die, they may gift up to $5,120,000 without incurring any gift tax liability.  In these cases, a gift tax return must be filed but there will be no gift tax due.  The forgotten tax is the potential capital gains tax.

When an individual gifts an asset, the asset retains the original basis (the donor’s basis).  This differs from an inheritance at death.  When an individual receives an inheritance, the inherited assets receive a step up in tax basis to the current market value.  The individual therefore does not have to pay any capital gains taxes if they decide to liquidate the assets to cash.

Let’s assume I have stock worth $100,000 that I wish to give to my daughter, Erin.  I originally paid $50,000 for the stock several years earlier.  If I gift Erin the stock, she retains my basis of $50,000 in the stock (now worth $100,000).  When she sells the stock, she will have to pay capital gains tax on the growth.  In my example she would pay capital gains tax on $50,000 (stock worth $100,000 less the basis of $50,000), if she liquidated the stock upon receipt of it.  It is important to remember this “forgotten” tax when looking at gifting strategies with the end of the year quickly approaching.

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This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.