Income Taxes and Gifts/Inheritances
By Robert A. Gustafson, CPA
Gifts and Inheritances are often misunderstood areas of taxation. In general, gifts are not taxable to the beneficiary, nor are they deductible by donors. If total gifts to an individual exceed a threshold (currently $11,000 per year), a Gift “Tax” return must be filed by the donor. The excess over $11,000 is removed from the donor’s estate tax exemption (currently $1,500,000.) This means that the decedent’s estate will pay no estate tax on the first $1,500,000 but is severely taxed thereafter. If I make a gift of $50,000 the excess $39,000 reduces my estate tax exemption to $1,461,000 when I die. If I use my entire exemption during my lifetime, I pay gift/inheritance taxes right now on excess gifts.
I always shudder when I hear someone say “I just put his name on it.” That was probably a gift. Especially bad is that the gift is measured at current value for gift purposes, but the recipient only gets the donor’s cost basis. I may have just handed them a huge capital gain to pay tax on! Gifts in contemplation of death have huge consequences and should not be done without professional advice.
Inheritances are generally not taxable income, but there are exceptions. If the money is coming from a deferred annuity, IRA, or retirement plan, there is likely income tax associated with the inheritance. There are often options for receiving this money, and they should be discussed with your CPA.
Let your CPA look before you leap!