Amy & Dan Smith's Planning for Life: Giving and Taxes

There is a relationship among income, gift and estate tax which can appear complex. However, in reality most gifts are not affected by taxes.

This column addresses non-charitable gifts. Unlike a gift to charity, a gift to a person is not deductible by the donor for income tax purposes. A gift to a person is not taxable income to that person.

There is a federal gift tax but (with the exception of Connecticut and Tennessee) states don’t impose gift taxes. Here’s how the federal gift tax works: A person may make as many gifts as he/she wishes each year so long as the total value of gifts to each person for the year is within the amount of the “annual exclusion.” The annual exclusion is subject to adjustment each year and is $14,000 for 2015 and 2016. So Dad can give up to $14,000 of gifts apiece to each child, grandchild and neighbor without having to file a gift tax return, no matter how many children, grandchildren and neighbors he has. Furthermore, Mom can do the same. In fact, if Dad wants to give up to $28,000 per donee and Mom doesn’t want to give anything, Dad can “borrow” Mom’s annual exclusion for that year. However, Dad will have to file a gift tax return which Mom will sign to show she is allowing him to use her annual exclusion. (To avoid that requirement gifts can be made from joint property, as with a joint bank account.)

What if in one year Dad gives Junior $14,000 in cash plus a share of ABC stock which has a market value of $100? (Assume that Mom isn’t in the picture to donate her annual exclusion.) In that case Dad will be required to file a gift tax return to report the gift, but probably won’t have to pay any gift tax. The reason: Each of us has an exemption. For 2016 the exemption amounts to $5,450,000. So the effect of Dad’s gift is that his exemption is reduced by the amount over the annual exclusion, $100. The balance of his exemption continues through his lifetime and applies at his death to his estate. Thus, only if his taxable estate at death exceeds the balance remaining of his exemption ($5,449,900 in this example) will his estate be subject to estate tax.

Please note that any gift between husband and wife, either during lifetime or at death, is not subject to gift or estate tax, no matter the size.

There is a subtle but important issue that should be addressed in the discussion of giving. In the above example in which Dad gave Junior a share of ABC stock, the value of Dad’s gift is measured by the market value at the time of the gift, $100 in this example. Let’s say that Dad paid $50 for that share some time ago, so his “basis” in the stock is $50. When he gives the stock to Junior, Junior takes the same basis. So, if Junior sells the stock for $100, he has a capital gain to report on his income tax return of $50. On the other hand, if Dad gives Junior the stock at his death, the basis is “stepped up” to the value on the date of death. If that value is $100 when Dad dies and Junior sells the stock for $100 after inheriting it, Junior has no capital gain to report.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com).

Amy V. Smith Wealth Management, LLC is an independent firm.  Amy V. Smith, CFP, CIMA offers securities through Raymond James Financial Services, Inc., member FINRA/SIPC.  Her office is located at 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176.  (Tel: 703-669-5022, www.amysmithwealthmanagement.com). Any opinions are those of Amy and Dan Smith and not necessarily those of Raymond James.  Raymond James does not guarantee that the foregoing material is accurate or complete and does not provide legal advice.  Dan Smith is not affiliated with Raymond James.