Giving away valuable assets this holiday season
It’s the time of year to give as gifts! Although anyone can write a check payable to loved ones or a favorite charity, you may want to consider giving away prized securities or other assets such as artwork, property, or collectibles. These gifts can be meaningful to the recipient, as well as providing tax and estate benefits. However, when making a donation of securities or other assets, there are important tax rules that you need to understand so that you can decide whether the donation makes sense to both the recipient and you personally.
The first important concept is knowing the cost basis of the gift. What was the initial amount you paid for the asset? Does that amount adjust at all for other improvements over time, like property upgrades? The second important concept is the fair / market value of the gift. This is the value of the gift today. The difference between the cost basis and the fair market value is goodwill or goodwill. Each of these concepts is treated differently for tax purposes depending on the type of donation you are making.
If you are considering donating to a favorite qualified charity, it may be to your advantage to consider highly prized securities or properties that you have owned for at least a year. Such a gift qualifies for an immediate tax deduction in the year in which it is made for the full market value of that gift. Also, since a qualified charity is a tax-exempt organization, it will settle the donation tax-free. That is, you do not have to pay any capital gains tax on the gift. This is a great way to avoid capital gains taxes, take a charitable tax deduction, and lower your estate if that’s part of your goal. Most important of all, you are supporting a cause that is important to you and to our society.
If you are considering gifts for your children or others, it is important to understand that cost basis and market value are treated differently. For these gifts, the cost basis follows the gift, not the market value. For you, the value of your donation is the cost basis and you may need to report to the IRS if the value exceeds the annual tax-exempt amount of $ 14,000 per person ($ 28,000 per couple). For the recipient, they enjoy the full market value of the gift, but they also often receive its cost basis (if the market value is less than their original cost basis, consult with your accountant for a more detailed analysis of the tax cost of the gift). base gifts). This means that you may have given your child a wonderful gift, but also potentially a capital gains tax bill in the future when you sell the asset. This is particularly true when giving away assets such as a home. However, this is not all bad, and there is a beneficial tax strategy to consider. Current IRS rules do not tax capital gains for people whose income falls below the 25% tax bracket. This offers you a unique opportunity to give much appreciated gifts to someone at a lower tax bracket. If this fits your circumstances, it will make a wonderful gift to someone, reduce their wealth, and eliminate an unrealized capital gains tax as well.
The holidays are about giving and sharing gifts. Take a little more time this year to consider whether a non-cash gift makes sense for you and your loved ones. Because tax treatment can be complicated, be sure to speak with your accountant before making a final donation decision. Often times, the gift of your own items is one of the most meaningful gifts of all.