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The Season of Giving- Gifting Your Assets

December 14, 2022

The Season of Giving- Gifting Your Assets

The holidays are a great time of year. It is a great opportunity to reflect and be with those that matter most. Along with spending time with family and friends, gifting is also on everyone’s mind. This can include or gifting assets to family members (and non-family members). Let’s review the basics of gifting assets in the spirit of the holiday season. 

The Basics: Gift Tax Exclusion

It would be great if you could gift away assets and that would be the end of it. However, there is a limit set by the IRS to the amount you can give to one individual before having to report the gift. This is known as the Gift Tax Exclusion. For the year of 2022, the Gift Tax Exclusion amount is $16,000. Once you have exceeded the limit, you must file Form 709. This exclusion amount includes money or any asset of value. 

The $16,000 limit is per individual recipient. So you can gift that amount uniquely to your son, daughter, aunt, best friend, or even a stranger on the street. If none of them are getting more than $16,000, you do not have to report anything to the IRS.

Do I Owe Taxes on my Gift?

The good news? There is no tax due for either end of a gifting transaction, unless the gifting individual has gone past the Lifetime Gift and Estate Tax Exclusion.

The Lifetime Gift and Estate Tax Exemption is the amount of money you can give over your life or have in your estate at your death without paying estate taxes. For 2022, that estate tax exemption is set at $12,060,000. If the gifting individual goes over $16,000 for the year, the amount above $16,000 goes against the total estate tax exemption. Let’s look at an example.

Peter Parker wants to gift his wife, Mary Jane, an asset valued at $116,000. Peter will have to file Form 709 this year, and since he is $100,000 over the $16,000 limit. That $100,000 will go against his lifetime estate tax exemption. His exemption number will now be $11,960,000. The IRS keeps records on your exemption over time, as should your financial advisor and CPA. It is only when the Lifetime Gift and Estate Tax Exemption limit is exhausted, that taxes would be owed by the gifting individual.

Something to keep in mind is that if you are married, each person can give $16,000 per year, which means if you give from a joint account or from two individual accounts in each married person’s name, you could give $32,000 per individual in 2022 as a couple. If you go above the $32,000 then a gift tax return needs to be filed. Gift tax returns are not like individual income tax returns. There is no joint gift tax return. Each person, even if married, needs to file an individual gift tax return reporting their gifts above the annual gift tax exclusion amount. 

What/ How can you gift? We’ll Discuss Three Ways

Cash- This without a doubt is the easiest and straightforward way to gift. You know exactly how much you are giving. This money can come from writing a check, wiring money, transfer between bank accounts, giving actual cash, etc.

Quick Tip: Give cash as a gift to help with a child’s, or grandchild’s, ROTH IRA account. Let’s say the grandchild has a summer job and has waged earnings (this is a requirement to opening a ROTH IRA account). For example, let’s say the grandchild earns $7,000 at his or her summer job. They decide to contribute $3,000 from their earnings. The grandparent can gift $3,000 to the grandchild and reach the maximum contribution limit for the year for a ROTH IRA. This could be a great way to teach a grandchild the principles of investing and how compounding interest works.

Stocks- Gifting stock is also a good option for gifting money to family members. Particularly if you don’t have cash to give and don’t want to create taxable consequences for yourself. For example, if you had bought Stock XYZ for $1,000 many years ago, and it is now worth $10,000, you would have a $9,000 capital gain if you sold it to give cash. 

Instead, you could give Stock XYZ from your account to a brokerage account in your family members name. No tax is due until your family member sells the stock. When they sell the stock, their gain would be whatever they sold it for minus your $1,000 cost basis. When you give stock, your cost basis carries over to the person who received the stock. 

This is often a very effective method of giving because sometimes beneficiaries are in lower tax brackets than you. 

529 Plan- The last option we will discuss is gifting to help fund a 529 plan. This is a great way to gift because the money will grow tax deferred in the 529 accounts, and if the funds are used for educational expenses, the distributions are tax free. 529 plans can be a great way to help family members save for college at a future date.

These are three efficient ways to gift during the holiday season, or anytime throughout the year. Please note that this blog did not go over all gifting options including paying directly for medical bills, paying educational expenses directly, or structuring a loan with a family member. If this is something you would like to learn more about, we are more than happy to schedule a call with you to review. These strategies tend to have more work involved and it is good to work with a financial advisor and CPA to ensure the gift is properly documented. Feel free to use this link to book a quick introduction call with us for more details.

Also, gifting to a specific charity is a completely different type of conversation. We have an article with more information on gifting to a charity that can be found here.

Summary

Gifting with any of these types of options is very generous and without a doubt the individual receiving the gift will be very grateful. Gifting can be a great way to get assets out of your estate while helping family members increase their net worth. With a good number of options available to choose from, it is important to work with an advisor, CPA, and accountant to find the best method for you and the ones receiving the assets.

This article is not meant for financial advice and is for educational purposes only. Always speak with your financial advisor, CPA, and accountant before making any financial decision.