One of the common questions this time of year is “How much can I gift to family members without tax consequences”?
It’s certainly a loaded question, and the answer is, it depends. Let me explain.
The Federal annual gift limit is $16,000 per donor to anyone and is increasing to $17,000 in 2023. For a married couple, they can gift $32,000 to any one person. As long as that gift is cash, there are no income tax consequences. The recipients can do whatever they want with that cash and also have no tax consequences from the receipt of that gift.
If you want that gift to be larger, there are strategies to accomplish that. Given that we’re late in the year, you can write one check now and a second one on January 1 of the New Year. This now gets you $66,000 to any one recipient. If that recipient is married, you can include your in-law in that gifting chain and increase your gift up to $132,000 in short order.
The next way to boost your large year end gift is by using some or all of your federal estate tax exemption -which is currently at $12.06 million per person and rising to $12.92 million a head in 2023. So, if you want to gift an asset worth $1 million, file a gift tax return to show that you’re using up $1 million of your $12.06. This is pretty simple to do.
But “don’t try this at home” without professional guidance. You have issues such as valuation, titling such a valuable asset and state consequences to deal with. In my former home state of MA, there are no gift limits, but not all states are similar.
Gifts of assets are a little tricky. First you have to deal with a valuation. The gift is accounted for at its fair market value (FMV). FMV isn’t always easy to resolve and may require a formal valuation. Don’t be cheap, large gifts are often examined by the internal revenue service, so don’t skip on a good valuation.
If the gift is other than cash such as an investment, a share of a family business or real estate investment, there are some tax issues. The donor and the recipient would suffer no income or gift tax consequences as a result of the gift. The twist is the basis, or tax cost in the hands of the recipient. The new owners tax cost is the exact same as the donor’s tax basis. This is called a carryover basis. When the asset is ultimately sold, the recipient may incur capital gains taxes to the extent that there is a gain over the carryover basis that you’ve received. The toughest to calculate are long term real estate holdings and large stock positions acquired over decades of investing.
Figuring out basis on a gifted asset can be challenging. If you have received such gifts, I would begin calculating that basis sooner than later.
John P. Napolitano CFP®, CPA is CEO of Napier Financial in Braintree, MA. Visit John P. Napolitano on LinkedIn or napierfinancial.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Napier Financial, US Financial Advisors and LPL Financial do not offer tax advice.
Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and Napier Financial are separate entities from LPL Financial. He can be reached at 781-849-9200.