It’s easy to evaluate, for gift tax purposes, the value of a cash present that, say, a client has given to a grandchild for college graduation. With the gift tax liability sitting at $14,000 in 2014 for any one person over the course of a year, there’s no difficulty in limiting a client to that amount and staying away from any need to pay tax on the gift.
But other types of gifts aren’t so easily evaluated. What if the client wants to make a gift of some stock that’s close to that $14,000 limit? What if it’s Facebook stock, and it’s risen in value 20 percent since the granddaughter’s birthday on Feb. 1? What about that old ’73 Mustang — the one that was bought for just $5,000 but is certainly worth more now — that the client’s grandson has had his eye on?
There are many situations like this where the value of the gift isn’t so cut and dried. And the last thing the client would want is to have the IRS on his or her trail after a perfectly innocent gift had been given years earlier. So here’s some guidance:
What’s fair market value?
The Treasury Department offers a pretty specific definition: “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” So for gift tax purposes, the price of the gift when the client first bought it is irrelevant — as is any price appreciation that takes place after the gift is made. The only thing that matters is the value at the time the gift is given.
Note that fair market value — the price a buyer would pay — isn’t the same thing as cash value, which is the replacement cost an insurer would pay. Cash value usually includes some depreciation and is generally lower than fair market value.
So if the client bought a car for $35,000 in 1997 and then later gave it to a grandchild when the Blue Book value was down to $10,000, the latter figure is the only relevant one for gift tax purposes. If $12,500 worth of Facebook stock was given to a grandchild in February, no gift tax would be owed, no matter how much it was worth by the end of the year.
Determining the value of a stock
But it is important for gift givers to take note of the original cost basis of a gift of stock. Someone who receives a gift of stock and sells it will have to pay capital gains on the increase in value from the original asset’s cost basis.
Going back to that Facebook stock, if the client bought it for $10,000, then gives it away at $12,500, and the grandchild sells it for $15,000, the cost basis for the gift recipient’s capital gains return is $10,000, not $12,500.
See also: Leaving a phoenix-like legacy
So it’s a very difficult to give a gift of appreciated stock without incurring some kind of tax penalty for the recipient. It’s probably best for all parties if a gift of appreciated stock is explicitly described as a long-term gift, rather than something the recipient should cash in right away.
Cost basis vs. current value
Gifts of things other than stock can change value too, of course. Cars generally decrease in value, while real estate increases in value. When a gift item has increased in value, of course, the cost basis for capital gains purposes is easy enough to figure. If the value of the gift item is less than the original purchase price — let’s say it’s that car that was bought for $25,000 but is now only worth $12,500 — the cost basis is still that original price. The recipient can sell the car for $15,000 and not incur either gift tax or capital gains tax. There is no taxable event at all.
Exemptions for couples
Don’t forget that a client and a spouse can double up their gift exemption for the year and give up to $28,000 — twice the current exemption of $14,000. A gift in which a married couple has joint ownership, then, is much more likely to avoid gift taxes than a piece of property owned singly.
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