Part One: Gifting and Taxes
As the holiday season approaches, many of us begin to think about gift giving. However, it’s important to understand the tax implications associated with making a gift. When you make a gift to another, there may be federal gift tax ranging from 18% to 40%. Typically, this tax is the responsibility of the giver, not the recipient.
However, there are exceptions: Certain gifts, such as direct payments for tuition or medical expenses, and gifts to spouses, are entirely free from federal gift tax.
Likewise, NO TAX is due if the amount of the gift is less than the annual federal gift tax exclusion amount (for gift giving above the annual federal gift tax exclusion amount see Part Two, below). In 2024, this amount is $18,000 per individual; $36,000 per married couple. (In 2025, these amounts will increase to $19,000 per individual; $38,000 per married couple). Accordingly, if you keep your gifts below these thresholds, you won’t owe any tax or have to file anything with the IRS.
Example: In December, 2024, you and your spouse gift your granddaughter $35,000. This amount is below the annual federal gift tax exclusion amount, therefore, no tax is due and no reporting to the IRS is required.
Note: Capital gains tax may apply when the recipient sells or transfers a gifted asset—details in Part Three, below.
Part Two: Gifting that Exceeds the Annual Exclusion
So, what happens if your gift exceeds the annual federal exclusion amount? Do you owe federal gift tax?
Not necessarily. If you gift more than the annual federal exclusion amount, you will need to report the excess amount by filing IRS Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return. Importantly, so long as the total amount of all gifts you have given during your lifetime does not exceed your lifetime federal gift and estate tax exemption, you won’t owe any gift tax. In 2024, the lifetime exemption is $13.61 million per individual ($27.22 million per couple).
Example: In 2024, you gift your daughter $1 million. Neither she nor you owe any taxes, however, you would have to file IRS Form 709 to report a gift of $982,000 ($1 million less the annual exclusion amount of $18,000). Your lifetime exemption would be reduced to $12,628,000 (assuming you had not made any previous gifts in excess of the annual exclusion amount).
Part Three: Gifts and Capital Gains Tax
While most individuals won’t incur gift taxes due to the annual exclusion and lifetime exemption amounts, capital gains tax may arise when the recipient sells a gifted asset. Certain gifts, such as real estate and stocks, have a “cost basis,” which is the original value used to determine capital gains or losses. When an asset is gifted, the recipient assumes the giver’s cost basis.
Example: You purchased a house in Ocean City, New Jersey for $100,000 in 1975. The house is now valued at $1 million. If you gift the property to your son, he receives it at your cost-basis of $100,000. Five years later, your son sells the home for $2 million. He owes capital gains on $1.9 million ($2 million less the gifted cost basis of $100,000).
Note: If you left the property to your son through your Will, he would receive it with a step-up in basis to the fair market value at the time of your death. Thus, if you died when the property was worth $1 million and your son sold it five years later when it was worth $2 million, he would only owe capital gains on $1 million ($2 million less the inherited cost basis of $1 million).
Gifting Tips:
- Consider Gift Options: Consider giving gifts that align with annual exclusion limits or educational contributions. Not only will this benefit the recipient now, it also reduces your taxable estate (so long as you don’t pass away within one year of making the gift in which case the amount is included in your taxable estate).
- Maintain Documentation: Keep thorough records of all gifts made, particularly as you approach exemption limits.
- Consult a Professional: Given the complexities of gift and estate taxes, consulting a tax advisor and estate planning professional (such as HighPoint Law Offices) can provide tailored advice for your financial situation.
Charitable Giving: Remember that gifts to qualified charities can often be deducted from your taxable income, offering a meaningful way to give while benefiting your tax situation. Further, the annual exclusion limits do not apply to charitable gifts.
