By: John P. Napolitano, CFP®, CPA, PFS, MST

This time of year, we get a lot of questions surrounding gifts. Most of the questions are about either charitable giving or family gifts.

Starting with gifts to family, the tax code permits annual gifts to be excluded from gift taxes if it’s less than $15,000 per donor and donee. That means you can give up to $15K to your child, their spouse and any of their children. For married couples looking to make gifts, each spouse has their own $15K limit which doubles the amounts just referenced.

Think about the intent of the gifts before you make them. If the gift is to help buy a home, then cash may be best. If the gift is to be a long term investment, perhaps you can gift the actual asset? When you gift an asset, the recipient gets what is called a carry-over basis. That means the cost in the hands of the recipient is the same as it was in the hands of the donor, with no capital gains tax realized at the time of the gift. The recipient will eventually pay the tax when they sell the asset.

There are exceptions to the annual gift limit for health care, education and spouses. Anyone can gift an unlimited amount to their spouse. Also, you can write checks directly to an educational or health care organization for anyone without impacting your $15K annual limit. This is very handy when it comes to helping with expenses for grandchildren or extended family members.

Gifting minority interests in businesses or investment real estate may also be ideal. With this strategy, you can make a gift today without impairing your control over the asset. For example, if your building is worth $1 million, you can give a 1/5% interest in the property and still control everything about it. An LLC or partnership agreement should also be in force to outline the rights of the parties. This agreement will be very important in the event of a death, divorce or other disagreement with your minority owner.

There are special rules with respect to gift made to qualified charitable organizations in 2020. Individuals may deduct 100% of cash contributions made in 2020 to the full extent of their adjusted gross income (AGI). Gift of property will still be limited to 60% of AGI.

There are big benefits however, to giving property, especially highly appreciated property, instead of cash. The real benefit is that you will get a deduction for the fair market value of the investment on the date of the gift, even if your cost basis is just one penny! Let’s say you were an early investor in XYZ Company, which is now a high flying company worth a lot. Gifting shares in the company helps you to lighten your concentrated position while keeping your cash intact. Check with your desired charity to be sure that they are a qualified charity and can accept appreciated securities instead of cash.

 

John P. Napolitano CFP®, CPA is CEO of US Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. US Wealth Management, US Financial Advisors and LPL Financial do not offer tax advice. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.

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