What to consider before gifting assets to to others

When gifting to qualified charities, most people know the tax rules: generally, taxpayers can deduct the value of their gift when donated. But what about when you make gifts to friends or family? Most of us also know such gifts are not tax deductible, but there are times when such gifts are tax-reportable and (less often), such gifts can actually be taxable to the person making the gift, not the recipient.

In 2019, any individual may make a gift of up to $15,000 a year to any other individual without having to report it to the IRS. For amounts gifted above that level in any given year, the person making the gift must file a Form 709 Gift Tax Return to report it to the IRS. Why? It’s to keep track of each taxpayer’s lifetime gifting. There’s a lifetime giving limit, and if you exceed that limit (unlikely for most of us) gifts made to others are actually taxable.

While the $15,000 annual limit is high enough that most of us won’t have to deal with Form 709 very often, there are situations that become tax-reportable without the grantor realizing it. The two most common I encounter:

• Providing financial support to a family member. If regular “monthly support” checks total more than $15,000 a year, this must be reported on a Form 709. Exceptions to this reporting rule: a) gifts to your spouse (which can be unlimited); b) medical or educational expenses paid directly to the institution; and c) gifts to political organizations
• Adding a relative/friend to a financial account as co-owner “in case of an emergency.” This seems innocent enough, but to the extent the account exceeds $30,000 (e.g. ½ goes to the co-owner), that is considered a gift and becomes reportable on a Form 709 in the year the person was added to the account. Note: for people with substantial assets, there are better ways to plan for emergencies!

A common strategy used to avoid tax reporting of gifts is called “gift splitting.” If you and your spouse make gifts to a third person totaling $30,000 or less in a given year, it’s not tax-reportable.

It’s important to note that gifts of stock – or any asset with a measurable value – are also subject to this tax-reporting rule if the value exceeds $15,000 in any one year. And if a donor makes a non-cash gift to another person, the donor’s cost in that asset becomes the recipient’s cost going forward. If the recipient later sells that asset, he/she may be subject to capital gains taxes on the difference between the cost & the selling price. Recipients should be aware of this for their own tax planning purposes before accepting such gifts.

While there are many instances in which a gift may be reportable to the IRS, gifts only become taxable when an individual makes gifts of more than $11.4 million during their lifetime (as of 2019) (for a couple, it’s $22.8 million). If you’re lucky enough and generous enough to use up your exclusions, you may have to pay the gift tax. Tax rates range from 18% to 40%, and the giver generally pays the tax.

As you might imagine, there are all kinds of sophisticated strategies related to gifting (in order to avoid taxes) when a person’s net worth exceeds the lifetime limit, but that’s best left for another article — or two.

In the meantime, it’s best to be aware of what constitutes a “gift” from the IRS’s perspective.

Karin Grablin is with SRQ Wealth, 2033 Main St., Suite 103 Sarasota, FL 34237, 941-556-9004. www.srqwealth.com Securities and investment advisory services offered through Cetera Advisor Networks LLC, a Broker Dealer and Registered Investment Advisor, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC, an SEC Registered Investment Advisor. Cetera is under separate ownership from any other named entity.

This story was originally published November 25, 2019 at 5:00 AM.