Are Large Gifts Taxable?

Peter VanderWoude, CPA, CGMA

October 1, 2016

Sometimes clients ask me if a large gift they received from someone during the year is taxable income. Receiving a gift is not an income taxable event. However, if you then sell the gift you may have taxable gain on sale to report on your income tax return. More on that later.

If you give a large gift to someone this year and its value is over $14,000 (referred to as the Annual Gift Exclusion), you are required to report the gift by filing a Gift Tax Return on IRS Form 709. Will there be tax due? Generally not, but your lifetime estate and gift tax exemption will be reduced. If you don’t expect your estate’s value to be above $5.45 million when you pass on, then this reduction of the estate exemption is not a concern. You may also give gifts to your spouse, political organizations, or pay tuition and medical expenses for someone  else without limitation to size or requirement to report the gift on an annual gift tax return.

To help illustrate how making a gift works, let’s take the example of a retired father giving gifts of $14,000 in cash to each of his five children for a total of $70,000 in 2016. Since the gifts are within the limit of the annual gift exclusion, there is no requirement to report these gifts.

The mother in this example can also give the same $14,000 to each of their five children without any gift reporting. However, this year the mother wants to be more generous and she gives $20,000 in cash to each of the five children for a total of $100,000. Mother will have to report her gifts on an annual gift tax return. The gift tax return will result in zero tax due, but her combined $5.45 million estate and gift tax exemption, kept track of on the gift tax return, will be reduced by $30,000 -- which is the total difference between each of the five gifts and the annual gift exclusion.

What if non-cash gifts such as appreciated shares of Google stock are given in the aforementioned example? The stock gift  would be valued at fair market value on the date of gift for gift tax purposes. For income tax purposes, when selling the stock gift the recipient would have to report the gain over the giver’s “cost-basis” of the gift. If mother gifted $100,000 of Google stock that she purchased for $10,000, and each of the children sell their one-fifth share of the gifted stock right away, they would each report a capital gain of $18,000 ($20,000 - $2,000) on their income tax returns. If mother sold the Google stock before making a cash gift, she would then report the total capital gain of $90,000 ($100,000 - $10,000) on her income tax return.

What are the income tax consequences to the five children if those same shares of stock were received through mother’s estate? Zero gain. Why? We will cover that in next month’s article.

Enjoy the fall season in the Finger Lakes!

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