Understanding The Gift Tax         

One of the most common misconceptions many of our clients come to us with is the gifting of property to their children.  Not only are they surprised that they can't deduct the gift, but they're often stunned to realize it may be taxable to them!

Many taxpayers believe that when they gift money to another individual that they can deduct a like amount on their own income tax return. Unfortunately, this is not true.

Every individual has what is referred to as lifetime gift and inheritance tax exclusion. This exclusion can be used to offset transfer (gift) tax on gifts made during the taxpayer's lifetime and the remaining balance is used to offset inheritance tax upon the individual's demise.


That exclusion for 2015 is $5.43 million per individual and will continue to increase over the next several years.

The lifetime exclusion for 2015 is $5.43 million per individual and will continue to increase over the next several years.

In addition to the lifetime exclusion, there is the annual  exclusion per person receiving the gifts ($14,000 for 2015). For example, suppose a couple desires to give the maximum allowed to their two children without reducing their lifetime exclusion. Each can give $14,000 to each child allowing them to give away a total of $56,000.

If their children were married, they could double the amount by giving the children's spouses a like amount. Of course, gifts can be made in excess of the $14,000 limit, but any amount over the $14,000 per person will reduce the lifetime exclusion and require filing a gift tax return.  

Real property, securities, etc., can also be given as gifts but require qualified appraisals to determine their market value. Gifts of property, which have appreciated in value, pass to a recipient at the giver's tax basis. 

This could subject the recipient to taxes on the appreciation whenever the recipient disposes of the property. For example, a single father gives his child a rental property with a market value of $150,000 and no mortgage. The father's cost to acquire the rental was $50,000 and he had taken $15,000 in depreciation.

Therefore, the child's basis in the property (i.e., the amount the child will use to measure any future gain or loss) will be $35,000 ($50,000 - $15,000). At the same time, the parent's gift will be valued at $150,000. The large difference between the father's gift value and the child's basis should be a concern unless other tax benefits come into play. 

For example, if the child occupies the home, and after two years qualifies for the exclusion of gain, the home can be sold with both the father and the child escaping taxation on the disposition of the property. The father's lifetime exemption, however, would have to be reduced by $136,000 ($150,000 - $14,000).

The obvious benefit of making gifts during your lifetime is to reduce your estate and minimize any inheritance (estate) taxes upon your death. However, when contemplating gifts other than cash, it may be prudent to contact our office to plan how to best structure a gift.