Gifts & Gift Taxes

Making gifts, whether to a family member or a charity, is a great strategy for shifting income to other family members. Gifts can be made in cash, by check, as appreciated securities (stocks, bonds or mutual funds), or as property (real estate, motor vehicles).

When the person making the gift (the “donor”) makes a gift, the value of the gift is the fair market value (FMV) of the property given on the date the gift is made (the “valuation date”). For gifts of cash or a check, the FMV is the value of the cash or check when gifted. For gifts of securities (i.e., bonds, mutual funds or stocks), the FMV is the mean between the quoted closing selling price on the valuation date and the closing selling price on the trading day before the valuation date. For gifts of real property (i.e., a house on a piece of land) where valuations are difficult to determine, the FMV is determined using the comparable sales method, taking into consideration differences in the date of sale, and size, condition and location of the properties being compared, and making all appropriate adjustments.

IRS regulations stipulate that the donor (not the recipient) must report their gifts on Form 709 only if their gift is greater than the annual gift tax exclusion amount:

Annual Exclusion Amount
(per Recipient)
2024 $18,000
2023 $17,000
2022 $16,000
2018-2021 $15,000
2014-2017 $14,000

For example, in 2024, each individual may give up to $18,000 to another individual each year, without incurring any gift tax liability. A married couple may give up to $36,000 to an individual (a split gift of $18,000 each). A married couple may give up to $72,000 to another married couple (a split gift of $18,000 each, to each spouse). There is no limit to the number of individuals who may receive gifts of up to $18,000 each year.

Any gifts made over the annual exclusion amount must be reported on Form 709 by the donor (not the recipient), and are subject to the gift tax, which can range from 18% to 40%. Married couples may not file a joint Form 709 gift tax return. Each spouse is responsible for filing his or her own Form 709 return.

Gifts of Appreciated Securities

A taxpayer may make a gift of appreciated securities to another family member with limited gift and income tax liabilities. Ideally, the recipient will be in a lower income tax bracket than the donor, and thus be able to recognize the gain on the sale of the appreciated securities while incurring a smaller income tax liability.

A taxpayer may make a gift of appreciated securities directly to a qualified nonprofit charitable organization. When you make such a gift, you will generally take a tax deduction for the FMV of the securities gifted, rather than just your cost basis in those securities. And because you are donating securities, your contribution and tax deduction may instantly increase over 20% (This assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20% and the Medicare surtax of 3.8%, and that the donor originally planned to sell the stock and contribute the net proceeds (less the capital gains tax and Medicare surtax) to charity).

For example, suppose you had purchased securities for $150,000 more than 12 months ago that now have a FMV of $300,000. If you donated these securities directly to a nonprofit organization, you would be able to claim a charitable contribution of $300,000 on Schedule A of your tax return. Instead, if you sold these securities first, you would pay a long-term capital gains income tax of $35,700 [= ($150,000 X 20% capital gains tax) + ($150,000 X 3.8% Medicare surtax) ]. You could then gift the remaining $264,300 to the nonprofit organization, and would be able to claim this amount as a charitable contribution on Schedule A of your tax return.

Gifts to §529 Qualified Tuition Plans

The IRS allows a special provision whereby an individual may prorate their contributions into a §529 Qualified Tuition Plan (QTP) over a five-year period for purposes of claiming the gift-tax annual exclusion. In essence, this IRS provision allows for the acceleration of four (4) gift contributions of up to $18,000 each into the current year. The only limitation is that the donor is prohibited from making any additional tax-free gifts to that recipient for the next five years.

This provision allows taxpayers to contribute up to five times the amount of the annual exclusion, or up to $90,000 (five (5) gifts of $18,000 each; up to $180,000 in the case of split gifts made by married couples) into a §529 Plan for the benefit of each of their children and/or grandchildren, or to other individuals whom the donor designates.

The gift of up to $90,000 into a §529 Plan does not have to be made all at once, either. The donor is allowed to make periodic contributions of whatever amount at whatever frequency, so long as the total amount contributed into the §529 Plan does not exceed $85,000 in that year.

All prorated contributions made into §529 Plans must be reported on Form 709.

I would be happy to discuss gifts and gift taxes with you at your convenience, or to prepare a Form 709 Gift Tax Return on your behalf.

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