Gift vs. Inheritance: Consider the Tax Difference
Wausau WI Buska Retirement Solutions Gift vs Inheritance

Most people do not pay income tax on assets they inherit, but if they later sell inherited assets such as appreciated securities and real estate, they may owe tax on the capital gains. The capital gain or loss is the difference between the selling price and the asset’s basis.

Thus, the basis can be an important factor when deciding whether you should gift assets now or transfer them to heirs at your death.

Capital Gains Taxes

Capital gains and losses are classified as short term or long term, depending on how long you own the asset. A holding period of one year or less is short term; more than one year is long term. Inherited property is considered long term regardless of how long you own it. Short-term capital gains are taxed as ordinary income, whereas long-term gains are taxed at rates ranging from 0% to 20%, depending on taxable income.

2021 taxable income thresholds for long-term capital gains

Wausau WI Buska Retirement Solutions Gift vs Inheritance

Because capital gains are included in net investment income, some taxpayers may also be subject to the 3.8% net investment income tax if their modified adjusted gross income exceeds $200,000 (single filers) or $250,000 (joint filers). Gains from certain assets, including coins, art, and other collectibles, may be taxed at higher rates.

What's the Basis?

Your basis in an asset is generally equal to the purchase price plus associated expenses (such as taxes and commissions on the transaction). Basis in real property may be adjusted upward for the cost of capital improvements or downward for depreciation taken for tax purposes and insurance reimbursements for casualty losses or theft.

If you are thinking about giving highly appreciated assets to your children, keep in mind that your basis will carry over with the gift. Let’s say you bought shares of an investment for $50,000 (your basis) 20 years ago and they are worth $150,000 today. You would realize a capital gain of about $100,000 if you were to sell the shares.

If you give the shares to your children during your lifetime, they would keep the same $50,000 basis. When your children sell the shares, they could face substantial capital gains taxes — for the gains during your lifetime plus any additional gains that occur after they receive the gift.

However, if you leave the assets to your children in your estate, their basis will step up to the value at the time of your death. Your heirs would be liable only for taxes on any capital gains above the stepped-up basis, effectively erasing all capital gains that occurred during your lifetime.

Gift Tax and Other Factors

In addition to the potential for a stepped-up basis on inherited assets, you might consider the following when deciding whether to gift highly appreciated assets to your children or other family members.

Will making gifts reduce your combined gift and estate taxes?

Gifted property is removed from your gross estate for federal estate tax purposes. A 40% tax rate applies to taxable estate assets exceeding the lifetime estate and gift tax exclusion ($11.7 million for individuals and $23.4 million for married couples in 2021; indexed annually for inflation). This high threshold could fall if the government needs to raise tax revenues in the future. Any gift over the annual exclusion amount ($15,000 for individual gifts or $30,000 for joint gifts) must be reported on a gift tax return, and it decreases the lifetime exclusion.

Does the recipient need the gift now, or can it wait?

Could you gift cash or other property that would not trigger capital gains tax instead?

What tax rate might apply to capital gains on the sale of the asset?

For example, if you or the recipient would pay a 0% rate on capital gains, there may be no benefit to waiting for a step-up in basis. On the other hand, if the recipient would be
subject to a higher tax rate, you could gift the asset or sell it yourself and gift the cash proceeds.

This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek guidance from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2021 Broadridge
Financial Solutions, Inc.

Advisory services are offered through Buska Wealth Management, LLC, a Registered Investment Advisor in the state of Wisconsin. Insurance products and services are offered through Buska Retirement Solutions, Inc., an affiliated company. Buska Retirement Solutions, Inc. and Buska Wealth Management, LLC are not affiliated or endorsed by the Social Security Administration or any government agency. All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. The information contained herein is not an offer to sell or a solicitation of an offer to buy the securities, products or services mentioned, and no offers or sales will be made in jurisdictions in which the offer or sale of these securities, products or services is not qualified or otherwise exempt from regulation. The information contained in this material have been derived from sources believed to be reliable, but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed.

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