Make gifts to family based on basis! Suppose you want to help out your kids and grand kids with gifts. If you make direct gifts to them, there is no deduction by you but they dont pay income tax on the gifts. There are some possible gift tax consequences though. You can give away each year up to $14,000 per donee ( recipient). If you are married, you can make a split gift and give double this amount each year! This is in addition to a life time exclusion of 5.34 million. Thus, you can give away a LOT of assets without worrying about a gift tax. However, it is VITAL that you give away the right assets. Here is the rest of the story. Whoever gets the gift, generally gets your basis in the gift. Thus, if you paid $14,000 for a car, that would be their basis for gain, loss and depreciation. HOWEVER, if the value of the item has depreciated so that the fair market value is LESS than your basis ( which is usually cost), their basis is usually the lower of the fair market value or your basis. So what does this mean in English. Here are the rules you need to know: 1.Give away property that has appreciated or is appreciating in value: When the property is sold, the gain above your basis, will be taxed to the recipient at his or her lower tax brackets. 2. Keep high-basis property that is declining in value: If you give away property whose basis is more than its value, their basis becomes the fair market value, which means that they would get no loss on the sale of the property. However, if you sold the property, you would be able to take a tax loss if it were business property or a capital asset such as stock, bonds , mutual fund shares or real estate. Thus, keeping the property yourself and then selling it could result in a capital loss that can be used to reduce capital gains plus up to $3,000 or ordinary income. Example: You own stock that you paid $20,000 that is now worth $25,000. If you give this stock to your granddaughter for her education, her basis for gain is what you paid, which is $20,000. On the other hand, if the stock at the time of the gift were worth $15,000, you would be MUCH better off selling the stock and taking a $5,000 capital loss. If you gave this same loss stock away to your granddaughter, she would not be able to take the loss since her basis for the loss would be the fair market value,which in this case would be the $15,000. Bottom line: Dont give away property that would result in a loss to you if it were sold! This is a big mistake and is sadly incurred by many people. If you give away cash, you dont have to worry about basis or gains or losses unless it is gifts of foreign currency. Please share this post. Material derived from my book, Lower Your Taxes: Big Time
Posted on: Tue, 29 Jul 2014 12:11:43 +0000
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