The Planner's Perspective: Holiday Gift Tax

Paul Morrone |

By Paul Morrone CFP®, CPA/PFS, MSA

Leave it to our taxing authorities to make giving money away a complicated process. As the old saying goes - the only thing certain in life are death and taxes - and even your good-natured gift to your favorite grandchild can fall subject to scrutiny by the IRS if you’re not aware of the rules. It is always wise to consider the financial ramifications of making gifts from both a portfolio and tax perspective, as the complicated (and antiquated) gift tax system here in the US doesn’t appear to be going away anytime soon. Luckily, gifts carrying a value of less than $15,000 per person per year can generally be made with no strings attached, as current law allows gifts under this amount to be excluded from taxation and reporting. Married couples have an even longer leash and can essentially pass $30,000 unencumbered to an individual by each writing a $15,000 check a designated recipient. Remember, the $15,000 is an aggregate limit applied to the cumulative amount of gifts you make to an individual from January 1st until December 31st, not just the big one during the holidays.

For substantial gifts made during the year (over $15,000 to a single individual), you may have to do some formal reporting to comply with the gift tax laws. Once gifts exceed this amount, a gift tax return is generally required to be filed. Filing a gift tax return does not necessarily mean that any gift tax will be due, however, as current federal tax law only requires payment of gift tax once cumulative lifetime taxable gifts exceeds $11.2mm. This means the vast majority of American households (an estimated 99%) may never pay a penny in gift (or inheritance) taxes, but it does not mean that they are exempt from complying with the filing requirement if gifts are made in amounts that surpass the $15,000 limit. And if you live in the state of Connecticut (the only state currently with a gift tax), you’ll have to comply with local taxing authorities as well.

Gifts don’t always have to be in the form of cash. Homes, cars, stocks, bonds, collectibles or just about anything else can be considered a gift. If you do intend to write a check, consider your overall portfolio and the assets included in it to effectively source the funds needed. Maybe you don’t have sufficient cash to make a gift but have plenty of portfolio investments that can be liquidated to generate the funds need. Before clicking the sell button, it is worthwhile to review all your holdings and their associated tax basis. Simply liquidating appreciated assets at a substantial gain can generate an unintended tax liability that you may not want to pay. Instead, it may be wise to consider gifting shares of appreciated assets and letting the recipient decide whether to liquidate the shares and incur the capital gains rather than shouldering that burden yourself. This may also be a prudent way to begin an investment program for younger or inexperienced investors. Conversely, you may want to sell assets currently at a tax loss (the ‘losers’) to generate a tax benefit on your current year tax return before gifting the sales proceeds.

With all this talk about taxes, I’ll answer a question that you haven’t asked yet. The answer is no, there is no income tax benefit to giving money to your children (sorry!) despite what you may hear. If you’re looking for a tax benefit, you’ll have to donate to a qualifying charity.

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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. US Wealth Management and LPL Financial do not provide tax advice or services.