MAKING CENTS: Significant gifts come with consequences

AS the year winds down, many think about making gifts to charities or loved ones as a part of shedding assets in their estate. This could be for estate tax planning, the fear of loss through a long term illness or simply for philanthropic purposes. Here we are going to dispel a few myths and highlight a few common misunderstandings surrounding gifts.

Starting with charity; any gifts that you make to a qualified charity are generally tax deductible. I say generally because if you do not itemize deductions on your tax return, there will be no tax benefit. On the other extreme, for those with very large charitable contributions, your deductions could be limited because of the Alternative Minimum Tax. If you are thinking of a big gift, check with your accountant to see if there will be any restrictions on your deduction.

Gifts to family members or friends; are never deductible for income tax purpose, but these gifts may be excluded from your future estate tax return. Under current law, each taxpayer has an exemption whereby any taxpayer may gift up to $14,000 to any recipient. That means a husband and wife can each give $14,000, making a total possible gift of $28,000. To do this properly, there should be two separate checks. If the account is in only one name, then the two checks should come from each donor’s personal account.

There is also a lifetime federal exemption of $5.25 million in 2013. This amount rises to $5.340 million for 2014. Essentially, this means that you can give away or die with up to $5.25 million, and pay no gift or death taxes to the IRS in 2013.

There may, however, be state death taxes to pay. In Massachusetts, the current exemption sits at $1 million.

When a gift is given that exceeds the annual exclusion amount of $14,000, a gift tax return must be filed or technically you owe gift taxes on that gift. This is frequently overlooked with gifts of real estate or college 529 plans. For the 529 plans, there is yet another tax exemption that allows you to contribute up to 5 years of 529 gifts currently, and spread them over a 5 year period. This also requires an annual gift tax return.

Gifts of real estate have a few problems. The first may be the tax cost. If mom gives you her house because she is concerned about losing it to long term health care costs, you’ve just inherited her tax cost. Your cost basis for calculating future gains from a sale will be whatever her cost basis is. If she bought the home five years ago, you probably have a high basis. But if she bought five decades ago, this could be a big tax hit.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.