Oakland, CA | East Bay; Understanding the Gift Tax Rules and IRS Limits

Hello, I’m Erik Wolfers, founder and managing member of First & Main Financial. We’ve been helping individual clients with perfectly personalized financial solutions since 2001—over twenty years now. Today, I want to talk a little bit about gifting.

We sometimes have people come to us who don’t quite understand how gifts work. If someone is going to gift you money before they pass away, before they come to their last day, there’s an annual gift tax limit or annual exclusion limit of $15,000 per year. I can give anybody that I want $15,000 and nobody cares. You don’t have to notify the IRS. If you give somebody more than $15,000 in a year, you have to let the IRS know—you file a form and then it gets tracked. However, everybody has a lifetime gift-tax exclusion of over $11mm. You can give away more than $11mm and pay no gift tax—and then if you do, you pay gift tax.

The reason for this is that the IRA doesn’t want you to give away your money and have nobody pays tax on it ever. The receiver of the gift (and this is confusing for a lot of people) does not pay tax—at least in most states and not on a federal basis for sure. Someone can give you $1mm and it’s yours, you get it tax free.

Questions can also arise about the gift of securities. Someone gifts you stock in Apple or Tesla or whatever stock you like, if they gift it to you and they’re still alive, you inherit the basis. If they had paid $10/share and it’s now worth a $150/share, you receive the stock and you own it as if you had paid $10/share. If you sell it right away, you’re going to pay the tax between $10/share and $150/share.

If someone passes away and their estate gives you shares of Apple, at least under current tax law as of 2021 (I don’t know if this will change), you get what’s called a step-up in basis. If the person who is gifting you the shares paid $10/share and it’s worth $150/share, it steps up to the current market value, which is marked as the date of passing of the person who’s gifting the money. That’s a pretty good deal—which some people think is not fair to have wealth transfer from one person to another and then have that person not having to pay any tax—but those those are the rules.

It may be incredible to think that you can give away $11mm without paying any gift tax, but again the gift tax would be in lieu of the estate taxes. If you pass away with more than $11mm or over $12mm, anything that’s above $11.5mm, you’re going to pay estate taxes. If you try to give it away before you pass away, you’ll pay gift tax. If you have in excess of the limit ($11.5mm), your estate will pay it after you pass away.

Those are just some basics on gifting and estate taxes. A couple can give away $15,000 each, so technically a couple might think of it as $30,000 that they can gift to any one person in any year without having to notify the IRS.

If you are looking for some financial guidance; whether for a one time financial plan or continuing advice on your investments, we invite you to meet with a First & Main Financial planner for a free consultation. We would be more than happy to sit down with you, assess your situation and review our services to help navigate your financial future.