’Tis the season for giving, and who better to receive than your family? During the holiday season, if you have the financial ability to give substantial money or property to children, parents, or other relatives, understand the tax implications for you and for them. And if it makes financial and tax sense for you, act before the end of the year.
Your tax results
There are no income tax costs for giving cash or property to family members. By the same token, there’s no deduction for such gifts, no matter how needy the recipient.
There are gift tax concerns when giving away your money or property. Here are key points:
- For 2013, you can give $14,000 to each recipient (cash and/or the fair market value of the property on the date of the gift) (this is called the annual gift tax exclusion). For example, you can give each of your grandchildren $14,000, for a total of $42,000. If you don’t use this amount in 2013, it can’t be carried over to 2014; a new exclusion (also $14,000 per recipient) applies for 2014. Gifts under the exclusion amount don’t have to be reported on the federal gift tax return, Form 709.
- If you’re married and your spouse consents to the gift, you can double what you give tax free, but you’ll have to file a gift tax return in this instance for your spouse to give consent.
- When adding funds to a 529 education savings plan, you can give 5 times the annual exclusion amount, or $70,000, for each recipient. Your contribution to a 529 plan is treated as a gift even though you retain control over the account.
- You can apply your lifetime exemption amount to gifts, eliminating any gift tax. This exemption amount is $5.25 million in 2013. The amount you use in your lifetime reduces the exemption your estate can use for estate tax purposes when you die. A gift tax return must be filed to figure your exemption; the return should be saved so that the accurate estate tax exemption can be figured when you die.
- Special rules apply for gifts to spouses.
Tax results for those who receive gifts
Your family and others can receive gifts of cash and property in any amount without any immediate tax consequences. However, if you give them property, they need to know your tax basis and holding period; this will impact whether they have gain or loss when they sell the property, and whether the gain or loss is long term or short term.
- Those who receive property from you can add your holding period to theirs, enabling them to have long-term capital gain even if they personally didn’t hold the property for more than 1 year. For example, you give stock you’ve held for years to your parent, who sells the stock the day after the gift. Your parent’s holding period is long term because yours was long term.
- If the fair market value of the property equaled or exceeded your basis at the time of the gift, their basis for figuring gain or loss when they sell is your basis.
- If the fair market value of the property was less than your basis at the time of the gift, their basis for figuring gain is your basis; their basis for figuring loss is the fair market value of the property on the date of the gift.
- If you pay any gift tax (which is only in very limited cases), this may increase their basis.
In gifting property, consider the impact that your largesse will have on other matters.
- Will is adversely impact financial aid applications?
- Will it limit or prevent entitlement to government assistance programs?
Clearly, giving a sweater or a gift card for Christmas isn’t a problem; gifting $10,000 or more in cash or securities could trigger issues. Talk with a financial advisor, as well as your tax advisor, before making any sizable gifts.