As the end of the year approaches quickly, there is still time to make gifts to charities or family members and to not only enjoy the giving but to also reap income tax benefits from the transfers. For example, where deductible items other than charitable gifts are at all significant, then the charitable gifts will be likely to support further income tax deductions, making the gift a benefit to both donor and charity. There is no transfer tax for such gifts which makes the approach even more attractive.
Although gifts to family members do not support an income tax deduction, depending on how the gift is made, there may be some income tax benefit derived. A gift of cash only reduces the amount of funds in hand for the donor and that may mean no more than that the donor will derive no income from the gifted funds in the future and so have no tax related to what has been given.
However, a more substantial benefit – albeit only in terms of future taxable income – may arise when the donor makes a gift in kind rather than in cash. An in kind transfer of stock allows the donor to make a gift subject to the annual exclusion from any gift tax while having the capital gains tax deferred until the recipient of that stock sells it. At that point, the tax is assessed at the rate applicable to the recipient, which may well be a zero rate if the recipient has low enough income. Remember that the zero bracket for capital gains ends at $39,375 for single taxpayers and at $78,750 for married taxpayers filing jointly.
The downside, under current law, is that a gift in kind means that the step up in basis which occurs at the death of the owner will not apply. The current gift in the hands of the recipient, though, may well outweigh any potential future step up and will also reduce the donor’s estate when death finally does occur.