Gifts & Inheritances
The tax treatment afforded gifts and inheritances can be a complicated. This page will provide some basic information. However, I recommend that you consult with a professional for the appropriate tax treatment given your specific scenario.
Estate Tax and Gift Tax are unified (that means they are integrated into one tax system). The federal Estate and Gift Tax laws and regulations impose taxes on transferring assets. The GIFT TAX catches transfers made during your lifetime, while the ESTATE TAX catches transfers at death (generally purusant to a Will or Grantor Trust). Transfers while the taxpayer was alive and at their death are combined and subject to one progressive tax. The rates are the same for both taxes.
Gifts
Generally, gifts are never taxable to the recipient upon receipt. However, income tax may be due from a subsequent sale or disposition of the gifted property.
If property is the subject of a gift (such as a home, car, stocks, etc.), the cost basis to the recipient (the one who RECEIVES the gift), will be the same as the basis in the hands of the DONOR (the one who gave away the property) – UNLESS, the fair market value (FMV) of the property was LESS than the DONOR’S BASIS at the time of the gift. In that circumstance, the basis in the hands of the RECIPIENT (used to determine fain or loss on sale or other disposition of the property) will be its FMV on the date of gift.
NOTE: Since the basis of property received as a gift in the hands of the donor (or it FMV on the date of the gift, if less) will be critical in determining any gain or loss on sale or disposition of the property at a later date, it is important to document this basis upon receiving a gift of property as it may be more difficult to establish in a later year.
For 2024 a person may give to another person up to $18,000 in total during the calendar year (up from $17,000 in 2023) without any tax consequence to the DONOR (remember – the RECIPIENT does not have any immediate tax consequence upon receiving a gift). For example, I could give my son up to $18,000 during 2024 without me incurring any gift tax liability. I could give my son and his wife jointly up to $36,000 without any consequence. My wife and I could make a joint gift to my son and his wife of up to $72,000 without gift tax consequence.
These are annual totals. In making any gift, it is advisable to include a letter or other document confirming that the amount involved is intended to be a gift (vs a loan, compensation, or other form of payment). If it is a joint gift, then the letter should state that is the intent of the donors. A copy of the letter and the underlying check or other form of payment should be retained forever.
Reporting Gifts to the IRS
What happens if a taxpayer gives money or other property to another person that totals in excess of the applicable limits given above? The taxpayer must file Form 709 to report the taxable gifts. A copy of the 2024 form 709 is displayed below.
As with the income tax return, Gift Tax returns (Form 709) are due on April 15 of the year following the year in which the taxpayer made the gift. The Gift Tax (if any) is due at the time of filing the return. Extensions are available, but interest will be charged from the regular due date of the return.
Inheritances
As with gifts, the beneficiary of an inheritance almost always has NO TAX to pay upon receipt of the inheritance. There may be tax due, however, upon the sales or disposition of the inherited property (such as a home or rental property, stocks, CDs, etc) after its receipt. All income earned after the receipt of inherited property is, of course, taxable to the beneficiary.
The basis for property inherited is its fair market value (FMV), either on the decedent’s date of death, or six-months later on the alternate valuation date (if the Executor made that election).
NOTE: Since the FMV of the property on the applicable date (death or alternate valuation date) will be critical in determining any gain or loss on sale or disposition of the property at a later date, it is important to document this value upon receiving an inheritance as it may be more difficult to establish in a later year.
There are special rules relating to stepped-up basis (where property is valued in the hands of the beneficiary at the current fair market value rather than its basis in the hands of the decedent) in community property states where property is held as community property (rather than as joint tenancy or tenants in common). In certain circumstances, the portion of the property held by the surviving community property spouse will also receive a stepped-up basis.
To illustrate, assume a husband and wife own a home with a value of $400,000, and a basis of $100,000 (what they originally paid for the home, including improvements). The husband dies. Absent community property considerations, his one-half of the property gets a stepped-up basis from $50,000 (1/2 of $100,000 cost basis), to $200,000. That means that in the hands of the surviving spouse, the house now has a basis of $250,000 (the decedent’s stepped-up basis of $200,000 + her $50,000 basis).
If she sold the property for, say $700,000, she would have a gain of $450,000 ($700,000 – $250,000). Of course, if she used that home as her primary residence for at least 2 of the prior 5 years (ending on the date of sale), she could exclude $250,000 of that gain. Further, in the special circumstance where she sold the home within 2 years of the date her husband passed away, she would be eligible for the larger $500,000 exclusion.
Assume the same facts except that husband and wife lived in a community property state (like CA), and held the property as COMMUNITY PROPERTY. Upon husband’s death, the entire property is adjusted to its current FMV of $400,000. When the spouse sold the property for $700,000, her gain would be $300,000 ($700,000 – $400,000).
How you hold title to property can have important tax consequences. It is critically important that you consult a tax professional when making these important decisions. It is also critical that the value at the time of death be determined and safeguarded as it will be instrumental in validating the basis at time of disposition.
There may be an ESTATE TAX RETURN (Form 706) due for the decedent depending upon the gross value of the decedent’s estate. Effective January 1, 2024, the federal estate and gift tax exemption amount increased from $12.92 million to $13.61 million per individual (a combined $27.22 million for a married couple), representing an increase of $690,000. Generally, the attorney who is administering the Will or the Trust will take care of that filing requirement, althought legally, the executor or trustee (of the Will or trust) is responsible for its timely filing.
A partial image of the form 706 appears below.