Gift Taxes and Navigating the Maze of Money, Assets, Stocks, and More

Bridget Handke, CFP®, CAP®
Nov 16, 2023 12:49:06 PM

Let’s talk about gifts–not just those wrapped in fancy bows but the ones involving stocks, property, and even art. Delving into the world of financial gifting can sometimes feel like stepping into a maze. But with the right guide, even the most complex labyrinths can become simple paths. Let’s explore the intricacies of the gift tax and the concept of annual exclusions and discern why the present might be an ideal time to exercise your generosity. This article will focus on gifts to individuals rather than charities. Before doing any gifting, we suggest consulting with a Financial Advisor to check the sustainability of your financial plan with your gifts included.

Why Give a Gift?

Certainly, gifting is a time-honored tradition that transcends mere tax advantages. While tax considerations can be undeniably significant, the motivations behind gifting are multi-faceted, encompassing emotional, financial, strategic, and social aspects. The act of giving, regardless of its size, can carry significant weight, influencing the lives of the giver and the recipient in numerous ways. Here are a few reasons some people give: 

  • Emotional Fulfillment: This can include reinforcing ties between family members and friends serving as an emblem of love, care, and appreciation. Witnessing a loved one benefit from a gift in real-time can be deeply gratifying, contrasting with bequests made after death. For many, gifting provides an avenue to shape their legacy, influencing positive change within their family or community while they're alive to witness it.
  • Financial Planning: Strategic gifting can help reduce the size of an estate, which might help mitigate potential future estate tax liabilities. Current gift tax exemptions are generous, and by gifting now, individuals can make the most of these exemptions, protecting against possible legislative changes. 
  • Strategic Succession: For business owners, gifting shares or interests can be part of a broader succession plan, ensuring continuity and a smooth transition. Gifting assets, like shares of a family business, can serve as a training opportunity, allowing the next generation to learn the ropes under the guidance of the current custodians.
  • Educational Support: Tuition fees, especially for higher education, can be substantial. Gifting can ensure that loved ones have access to quality education without the burden of debts. It can be a means to help your loved ones achieve independence.
  • Health and Wellbeing: Gifting can cover medical expenses, ensuring that loved ones receive the best possible care without financial strain. Additionally, supporting older adults, be it parents or other relatives, can provide them with comfort and care in their twilight years.
  • Real Estate and Housing: In heated property markets, gifting can help loved ones secure a home, providing a stable foundation for their future.
  • Encouraging Financial Responsibility: Gifting assets, especially to younger recipients, can be a tool to teach financial responsibility, investment strategies, and the value of money.
  • Cultural or Traditional Reasons: In many cultures, gifting during specific occasions like weddings, births, or other milestones has a deep-rooted tradition, symbolizing blessings and goodwill.

In essence, gifting is a multifaceted activity, with motivations ranging from financial strategy to profound emotional sentiments. The act of giving, regardless of its size, can carry significant weight, influencing the lives of both the giver and the recipient in numerous ways. 

What Is Gift Tax?

Gift Tax is Uncle Sam's way of ensuring that when you gift assets, you're not merely sidestepping the estate tax. Essentially, it’s a tax on the transfer of assets where you don't get something of equal value in return.

Who's Picking Up the Tab?

Typically, if there's a gift tax due, the giver (that's potentially you) handles it. However, the labyrinth of tax laws provides specific pathways, such as exclusions and exemptions, that can help bypass or reduce this liability.

How to Give a Gift? There are Many Ways!

Annual Exclusion = Your Best Friend

There is this wonderful thing called the annual exclusion. You can gift up to $17,000 in 2023 to anyone without being subject to gift tax. Married? Together, you and your spouse can double that to $34,000 per recipient. This exclusion counts for any person you want to gift to, not just your heirs. The annual exclusion amount is updated yearly.

There are a couple of instances where payments are not inherently seen as gifts and therefore, do not count toward your annual or lifetime gift exclusions. For instance: 

  • Tuition Payments: Paying for someone's school? This doesn’t typically count towards the annual or lifetime gift exclusions. To bypass gift tax, the gift must make the tuition payment to the educational institution directly. You can’t give the money to the student (or their parents). The exclusion covers tuition only. Related expenses such as books, supplies, room and board, or other similar expenses don't qualify. Sadly, the gift tax exclusion does not extend to paying off a student loan unless the giver co-signed that loan. 
  • Medical Payments: A 2019 study by The National Center for Biotechnology Information showed that between 37% and 58% of bankruptcies had medical expenses as a contributing factor. Fortunately for some people, the IRS has an unlimited gift tax Medical Exclusion. The gifter must make payments directly to the person or institution providing the medical care. Qualifying expenses include diagnosis, cure, mitigation, treatment, or disease prevention, and for the purpose of affecting any structure or function of the body, or for transportation primarily for and essential to medical care. It also includes payments for medical insurance. However, the exclusion does not cover expenses that are reimbursed by insurance. 

Gifting Larger Amounts

You can certainly gift assets more than the annual exclusion amount if you’d like. If you do so, you will need to file tax form 709. The amount gifted will go against your lifetime federal estate tax exclusion amount. Currently, an individual can leave an estate worth $12,920,000 and not pay federal estate tax. Double for married couples. However, the Tax Cuts and Job Act of 2017 is sunsetting in 2026, and so will this large exemption. If Congress doesn’t pass a law to retain this estate exemption amount, the exemption will likely be reduced to about $7,000,000. (The amount depends on inflation).

For this reason, people with larger estates may benefit by gifting now before the exemption amount shrinks. Note that you can give to your loved ones via a trust, which has some controls and protects loved ones from creditors. Consult a qualified estate planning attorney if this is of interest to you.

Cost Basis and Fair Market Value (FMV): The Dynamic Duo

When gifting assets, two critical terms are cost basis and FMV. The cost basis is what you originally paid for the asset. FMV, on the other hand, is its value on the day of the gift. Let’s say you gift stocks purchased for $2,000 (cost basis) worth $5,000 on the day of the gift (FMV). The value of the gift is $5,000. That’s for your records. The cost basis comes into play with the recipient selling the stock. If they sell it for more than $2,000, they have a capital gain for which they may owe tax. The recipient inherits the cost basis from the giver., but h Here are a few real-world examples of how this may play out: 

  • Gifting Your Home Equity: Let's say you're parting with your family home and want to give your child a leg up by selling it to them below market rate. The gap between the FMV and your sale price is a gift. If the home's FMV is $500,000, but you give your child a deal of $400,000, you've gifted $100,000. Keep that annual exclusion in mind. If you haven’t given that recipient any other gifts that year, you can utilize the annual gift exclusion. If you are married, $34,000 of the $100,000 may qualify as the annual gift exclusion. You would file a form 709 for the remaining $66,000 gift.
  • Stocks and Bonds: Gifting stocks and bonds can be a popular choice. The giver gifts the actual securities to the recipient. Since they don’t sell the security, they don’t realize capital gains, nor will they pay capital gains tax. Because of this, the giver may feel they can give more to the recipient. Note that the recipient will inherit the cost basis, and when they go to sell the security, if there is a gain, they may face capital gains tax. This can be a strategic move if the giver is in a higher tax bracket than the recipient. 

Note: This only works if the securities go from an individual, joint or trust account to the same for the recipient does not work with retirement accounts.

  • Art and Collectibles: If you give art, how do you determine the FMV of an art piece or collectible? FMV is often based on recent sales of similar items. Given the subjectivity, professional appraisals are usually recommended.
  • 529 College Plan Gifting: Setting up a 529 college plan can be an excellent way to give funds to a child or grandchild for post-secondary education. You can even gift up to 5 years’ worth of the annual exclusion in one year and avoid paying gift tax. A married couple can double that amount. Note that if you gift five years’ worth of the annual exclusion at once, you won’t be able to use the annual exclusion again for that recipient until the five years are up. Unlike other gifts, 529 plans remain in control of the giver but are for the recipient's benefit. The funds grow tax-free, and if used for qualified educational expenses for the beneficiary, withdrawals are also tax-free. 

A Few Other Factors to Bear in Mind

State Regulations

States may also impose a gift tax. Given the variations across states, consulting a Financial Advisor or tax expert familiar with state-specific nuances is always advisable. While Minnesota doesn’t enforce a separate gift tax, residents should be wary of the three-year look-back provision, which might impact state estate taxes.

Why Now May Be a Great Time to Gift

  • Exemption Advantage: Generous exemptions exist today, as described earlier, but may go away in 2026. Congress could also pass legislation earlier reducing the exemption. 
  • Locking in Value: Are the assets you are thinking of giving poised for appreciation? If so, giving now will remove the asset from your estate and allow it to grow for your loved one on their balance sheet. This could reduce your future estate taxes.
  • Economic Perks: Providing a financial boost to loved ones during unpredictable times can be priceless. The tangible, real-time difference your gifts can make in your loved ones' lives is immeasurable, from facilitating major life events like purchasing homes to alleviating financial strains.

There's magic in witnessing the real-time impact of your generosity.

Gifting, with all its warmth and kindness, does come with rules. By understanding the intricacies, you can ensure you and the recipient truly benefit. Always discuss with your Financial Advisor or tax preparer when in doubt. Remember, it's not just the gift, but the thought (and a sprinkle of strategy) behind it that counts!

Estate Planning Guide Download

Investment Advisory services offered through Birchwood Financial Partners, Inc. an SEC Registered Investment Advisor.

All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Opinions expressed herein are solely those of Birchwood Financial Partners, Inc., and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual adviser or qualified professional before making any financial decisions. We are not affiliated with or endorsed by the Social Security Administration or any government agency. The inclusion of any link is not an endorsement of any products or services by Birchwood Financial Partners. All links have been provided only as a convenience.