Multiple types of taxes
Federal gift and estate taxes generally apply at a rate of 40%. This transfers in excess of your available gift and estate tax exemption. Under the Tax Cuts and Jobs Act, the exemption has approximately doubled through 2025. For 2018, the exemption is $11.18 million. It is twice that for married couples with proper estate planning strategies in place.
Even if your estate isn’t large enough for gift and estate taxes to currently be a concern, there are income tax consequences to consider. Plus, the gift and estate tax exemption will drop back to an inflation-adjusted $5 million in 2026.
Minimizing estate tax
If your estate is large enough that estate tax is a concern, consider gifting property with the greatest future appreciation potential. You’ll remove that future appreciation from your taxable estate.
If estate tax isn’t a concern, your family may be better off tax-wise if you hold on to the property and let it appreciate in your hands. At your death, the property’s value for income tax purposes will be “stepped up” to fair market value. This means that, if your heirs sell the property, they won’t have to pay any income tax on the appreciation that occurred during your life.
Even if estate tax is a concern, you should compare the potential estate tax savings from gifting the property now to the potential income tax savings for your heirs if you hold on to the property.
Minimizing your beneficiary’s income tax
You can save income tax for your heirs by gifting property that hasn’t appreciated significantly while you’ve owned it. The beneficiary can sell the property at a minimal income tax cost.
On the other hand, hold on to property that has already appreciated significantly so that your heirs can enjoy the step-up in basis at your death. If they sell the property shortly after your death, before it’s had time to appreciate much more, they’ll owe no or minimal income tax on the sale.
Minimizing your own income tax
You should not gift property that’s declined in value. Your better option is generally to sell the property so you can take the tax loss. You can then gift the sale proceeds.
Capital losses can offset capital gains. Up to $3,000 of losses can offset other types of income, such as from salary, bonuses or retirement plan distributions. You can carry forward excess losses until death.
Choose gifts wisely
No matter your current net worth, it’s important to choose gifts wisely. You can contact us at any time to discuss the gift, estate and income tax consequences of any gifts you’d like to make.
More from the IRS
The IRS provides information on the estate and gift taxes. You can learn more about estate and gift taxes from the IRS online at: https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes.
More from GLR
Individuals may consider charitable IRA rollovers once they are age 70½. You can learn more at: http://glrcpa.com/charitable-ira-rollover/.