Giving the Gift of… Taxes?
When it comes to taxes there is never one answer that fits every scenario. Gift tax is no different. We get this question a lot when our clients get large gifts (lucky you if it’s for a holiday!) or become the benefactor of an inheritance. For the most part, funds will transfer to beneficiaries’ tax-free. But of course, there are exceptions. Some of these exceptions are when there is a boatload of money to distribute or if the money is not actually money but in another form such as asset or IRA.
Money Gifts
You can gift $17k or less to one individual a year with no paperwork at all. It’s not taxable to the recipient or deductible for the payer. Just a head’s up, that amount changes each year. Right now, if you gift more than the $17k, there is a form called Gift Tax Return that needs to be filed but, you’re still not required to pay any tax. You’ll only pay tax if the payer exceeded an $11.4 million lifetime exclusion. By filing the Gift Tax Return form, you are identifying the times you chipped away at the $11.4 million while you were still alive.
You’ve inherited an IRA
IRA’s typically avoid the “estate” because beneficiaries were identified when the account was opened, and the money will go directly to those beneficiaries’ tax-free. If it stays in the form of a retirement plan it’s not taxable. If you cash out the IRA, the money becomes taxable but there are no associated penalties. This is all pretty straight forward unless the person who passes was over the age of 70.5. At that age, they needed to start taking Required Minimum distributions. In these cases, the IRA generally needs to be cashed out within 5 years which impacts the taxability as it’s no longer living in the retirement plan. Specific rules may apply to the individual’s account or plan.
Assets – aka Homes, Stocks, or Rental Property
If you hold them, you’ll pay the tax on the gain or experience the tax benefit of a loss. For example, let’s say your mom passes and she owned a home that had a fair market value of $200k on the date of her death. Because the emotional task of cleaning out the house is so daunting (and she lived there for 40 years – we won’t call it hoarding but….) you end up selling it a year and a half later for $325k. Your taxable gain on this transaction is $125k. Had you sold it right away there would have been no tax liability? In fact, when you factor in the closing costs and any other expenses related to prepping the property to sell, there could be a loss. This loss could help your tax profile and reflect a bigger refund.
The same is true for stocks. You can have them transferred to your name, hold them and sell later. If you do this, be sure that your new financial advisor is aware of the “step-up in basis.” This means it needs to reflect today’s value of that stock and not what your mom paid for it way back when which means HUGE savings. If you are looking for more specific information from the IRS you can find it on their page about Gifts & Inheritance. However, once you start selling and dividing assets, facing large money gifts or diving into complex IRA terms, it’s a good idea to consult with a professional. If this is something you’re currently or about to be facing we’d love to help you sort it all out so you receive maximum benefits while filing and reporting properly.
Looking for more information on Gift Taxes? Get our handout for more details.
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