It’s the gift giving time of year! Although anyone can write a check to their loved ones or favorite charity, you may want to consider a gift of appreciated securities or other assets such as art, property or collectibles. These gifts may be meaningful to the receiver as well as provide you with tax and estate benefits. When making a gift of securities or other assets, however, there are important tax rules to understand so you can decide if such a gift makes sense for both the receiver and for you personally.
The first important concept is to know the cost basis of the gift. What was the initial amount you paid for the asset? Is that amount adjusted at all for any other improvements overtime, such as upgrades to property? The second important concept is fair/market value of the gift. This is how much the gift is worth today. The difference between the cost basis and the fair market value is the capital gain or appreciation. Each of these concepts is treated differently for tax purposes depending on the kind of gift you are making.
If you are considering a gift to a favorite qualified charity, it can be advantageous to consider highly appreciated securities or property that you have owned for at least a year. Such a gift qualifies for an immediate tax deduction in the year it is made for the full market value of that gift. Additionally, since a qualified charity is a tax-exempt organization, they will liquidate the gift tax-free. That is, you do not have to pay any taxes on the capital gain in the gift. This is a great way to avoid capital gains taxes, make a charitable tax deduction and reduce your estate if that is part of your goal. Most importantly of all, you are supporting a cause that is important to you and our society.
If you are considering gifts to your children or other individuals, it is important to understand that cost basis and market value are treated differently. For these gifts, the cost basis follows the gift, not the market value. For you, the value of your gift is the cost basis and may need to be reported to the IRS if the value exceeds the annual tax-exemption amount of $14,000 per individual ($28,000 per couple). For the receiver, they enjoy the full market value of the gift, but they also usually receive your cost basis (if the market value is less than your original cost basis, consult with your accountant for a more detailed analysis of the gifts’ tax cost basis). This means you may have given your child a wonderful gift, but also potentially a future capital gains tax bill when they sell the asset. This is particularly true when gifting property such as a house. This is not all bad, though, and there is a beneficial tax strategy here to consider. Current IRS rules do not charge any capital gains taxes to individuals whose income falls below the 25% tax bracket. This offers you a unique opportunity to give highly appreciated gifts to someone in a lower tax bracket. If this fits your circumstances, you will make a wonderful gift to someone, reduce your estate, and also eliminate an unrealized capital gain tax.
The holidays are all about gift giving and sharing. Take a little extra time this year to consider if a non-cash gift makes sense for you and your loved ones. Because the tax treatment can be complicated, be sure to talk with your accountant before making a final gift decision. Often the gift of your own items is one of the most meaningful gifts of all.