With tax rates somewhat higher than in prior years based on increases in income taxes, capital gains, and the new so-called Medicare tax, (which is basically an investment income tax for those who earned more than $200,000 if single and $250,000 if married) the net rate of return for people may be somewhat lower than it has been. Therefore, it is often beneficial for wealthier people to transfer more assets to children and grandchildren, who are probably going to be in lower tax brackets while they are alive.
As we all know, it is relatively easy to give money away, as a person has a right to give $14,000 away to as many different people in a year as they so desire without having to file a gift tax return. Keep in mind that a husband and wife may also give a combined $28,000 per year per person. These gifts do not need to be gifted only to children, but may include grandchildren, nieces, nephews, or other relatives, or friends.
Remember: Gifts to charities are not limited to this dollar amount, but the amount for income tax deductibility will depend on one’s income and itemized deductions (see your accountant).
In addition to the annual exclusion gifts of $14,000, there is also the lifetime exemption of $5,340,000 (in 2014) that a person may give away without paying any tax. This means that a married couple may give $10,680,000 over their lifetime, in addition to the $14,000 annual gifts, before any gift tax will be paid.
Now, with the Estate Tax Exemption being as high as it is, we pay special attention, before making gifts, to what is known as the cost basis of the asset. Once the asset is gifted, the recipient receives the asset at the donor’s tax basis. For instance, if you bought Apple stock at $10 a share (you wish) and it is now at $70 a share, if the stock is gifted to Sally, Sally receives the basis of $10 a share, which means that when she sells it, she will pay the capital gains tax on $60.00. Yikes! However, if the you died with the stock and left it by will or trust to Sally, then she receives it at the value of the date on your death….so that when it is sold, there is nominal tax basis if any at all.
However, remember the stock is included in the estate of the donor, so that if this person had total assets greater than $5,340,000, there would be an estate tax.
Therefore, as you may see, it is relatively easy to make gifts, but you should pay attention to whether it is beneficial from the estate, gift, and income tax standpoint for all parties before making a gift.
Keep in mind, the issue of gifts discussed in this article is for tax-related issues only, and they are not to be applied for divestment purposes for obtaining Medicaid eligibility, as this area requires a completely separate set of rules and regulations. In addition, I am not an accountant, nor do I play one on TV. Need Tax advice? Call your accountant! Don’t have one? Ask me for a referral of a trusted advisor within my network.