Income Tax Deductions

Gifting to Individuals

Gifting to family members and others during one’s lifetime is rather common, but can have significant tax ramifications if done poorly.

Tax-Efficient Gifting Methods

Annual Gifting Exclusion

• Most direct gifting of cash or property is tax-free up to $16,000 per year. If you are married, you can gift split which doubles the amount of tax-free gifting allowed ($16,000 from each spouse for a $32,000 total gift).
• As of 2022, the lifetime tax-free gift amount for individuals was $11.7 million per person (charitable gifts are not factored in towards this limit).

529 Plans

• A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs.  Most typically these are opened for children to help save for their college education.
• Gifts of cash up to the annual exclusion amount of $16,000 can be contributed tax-free each year to the beneficiary’s 529 plan. Appreciated securities are not allowed.
• Most plans allow the ability to front-load the account with five years’ worth of annual exclusion gifts, which can be up to $80,000 ($16,000 x 5).

Medical & Education Expenses

• Unlimited amounts can be gifted towards education as long as they are paid directly to the qualified educational institution (this exclusion applies to tuition only).
• Unlimited amounts can be gifted toward someone’s medical expenses as long as they are paid directly to the qualified medical care provider. Appreciated securities are not allowed.

Gifts to a Spouse

• Unlimited assets can be gifted to a spouse if they are a US citizen and you are legally married. Limits are placed on foreign spouses. Appreciated securities are allowed.

Valuation of Gifts

Appreciated Assets
The cost basis of appreciated assets is transferred to a recipient if gifted while the donor is alive. Inherited assets receive a stepped-up basis to the date-of-death value.

Depreciated Assets
In some cases, the recipient will receive a depreciated asset such as a real estate property. If the donor is alive and the asset is sold for less than fair market value, fair market value at the time of the gift will be considered the cost basis. If the asset is sold for more than the original donor’s cost, the original cost will be used to determine the gain. If the asset is sold between fair value and original cost basis, the gain or loss will be zero.

If the asset is gifted at death, the cost basis is stepped down to the value of assets on the date of the death. If the asset is sold between fair market value and original cost basis, the gain or loss will be zero.

Gifts can be a powerful form of legacy, with the potential to profoundly touch lives and provide lasting benefits. With a well-crafted gifting plan, you are able to leave something meaningful behind while also ensuring advantageous estate and tax planning over the long-term.