Gifting assets, whether to charitable organizations or individuals, represents a powerful tool in financial and estate planning, allowing wealth transfer during one’s lifetime. However, the seemingly simple act of giving carries tax implications, primarily affecting the person making the gift (donor).  It’s crucial to understand that the tax treatment of gifts depends on who the recipient is:

Gifts to Qualified Charities: When you donate assets to a recognized charitable organization, your donation can generally be claimed as an itemized deduction on your income tax return, potentially reducing your taxable income. In addition, gift to a qualified charity is essentially subtracted from your gifts for the year before determining if you have any taxable gifts.

Gifts to Individuals: Transfers of wealth to individuals, on the other hand, are the primary focus of federal gift tax. While most gifts to individuals won’t result in any actual tax due to generous exclusions and exemptions, they are still subject to these specific rules.

The person receiving the gift generally does not have to pay income tax on its value, nor are they typically responsible for gift tax. However, recipients do need to be aware of the “basis” of the gifted property. This basis is crucial because if they later sell the asset, it will determine any taxable capital gains or losses.

Charitable donations can be a powerful tool in tax planning, allowing individuals to support causes they care about while potentially reducing their individual income tax liability when their itemized deductions exceed standard deductions.

Basic Requirements for Deductibility

To be deductible, a charitable contribution must be made to a qualifying organization (as defined under § 170(c)), and there is proper substantiation for the donation. The type of substantiation required depends on the amount and nature of the contribution.   

Valuation of Noncash Property Donated

A charitable contribution may be in form of cash or property. The valuation of non-cash property for the purpose of determining the deductible amount depends on the property type and how charitable organization used the property contributed.

• Long-term Capital Gain Property: This includes property that would have resulted in long-term capital gain if sold (e.g., stocks held for more than one year, business-use property with gain in excess of ordinary income depreciation recapture). The amount of deduction for donating long-term capital gain property is its FMV at the time of the contribution.
  • Exception: if the charitable organization use the property for purposes not related to its charitable purpose, the deduction is limited to the adjusted basis of the property.
• Ordinary Income Property: Any non-cash property that cannot be treated as long-term capital gain property defined above. The amount of deduction for donating ordinary income property is lesser of FMV or adjusted basis of the property at the time of the contribution.

Exception: For personal-use vehicle with FMV of more than $500 and it is subsequently sold by the charitable organization, the deduction is limited to the lesser of the gross proceeds from the sale of the vehicle, or the FMV on the date of contribution.

AGI Limitations on Amount of Deduction Allowed:

The maximum deductible amount in a single tax year is limited by a percentage of taxpayer’s Adjusted Gross Income (AGI). Any excess contributions can generally be carried forward for up to five subsequent tax years (§ 170(d)). The deductions are generally applied in the following order to maximize the current year’s deduction.

• • Cash Contributions to Public Charities and Private Operating Foundations (“50% organizations”):
    • Limited to 60% of AGI. (This increased limit is temporary and is set to expire at the end of 2025, reverting to 50% in 2026 unless extended by Congress.)
  • Value of Ordinary Income Property Donated to Public Charities and Private Operating Foundations (“50% organizations”):
    • Limited to 50% of AGI minus cash contributions to 50% organizations
  • Long-term Capital Gain Property Donated to Public Charities and Private Operating Foundations (“50% organizations”):
    • Limited to 30% of AGI minus cash contributions subject to 60% or 50%
  • Cash Contributions or Value of Ordinary Income Property Donated to Private Non-Operating Foundations (“30% Organizations”):
    • Limited to the lesser of:
      • 30% of AGI.
      • 50% of AGI, reduced by all contributions to 50% organizations.
  • Long-term Capital Gain Property to Private Non-Operating Foundations (“30% Organizations”):
    • Limited to the lesser of:
      • 20% of your AGI.
      • 30% of your AGI, reduced by any capital gain property contributions subject to 30% AGI limit
      • 30% of your AGI, reduced by any other property contributions subject to 30% AGI limit
      • 50% of your AGI, reduced by the sum of all contributions subject to 60%, 50%, or 30%.

• IRS resource: IRS publication 526

Tax Planning Considerations for Charitable Donations

Timing:

• Bunching Contributions: If your itemized deductions, including charitable contributions, are close to the standard deduction amount, you might consider “bunching” your contributions into a single year every few years to exceed the standard deduction and claim the itemized deductions. In the intervening years, you would take the standard deduction.
• Donor-Advised Funds (DAFs): A DAF is a charitable giving account established at a public charity. You contribute cash, appreciated securities, or other assets to the DAF, receiving an immediate tax deduction in the year of contribution. The funds in the DAF can be invested and grow tax-free.  You can then recommend grants from your DAF to various qualified charities over time, which allows you to “bunch” contributions into a high-income year to maximize your current deduction, while distributing grants to charities over many years.

Conversion of Tax Characteristics:

• Donating Appreciated Capital Gain Property: By donating appreciated capital gain property directly to a qualified charity, you can potentially avoid paying the capital gains tax that would have been due if you sold the property and then donated the cash. This effectively “converts” the potential capital gain into a tax-free transfer.
• Qualified Charitable Distributions (QCDs) from IRAs: For Seniors (Age 70½+): If you are age 70½ or older, you can make a Qualified Charitable Distribution (QCD) directly from your Traditional IRA to a qualified charity. The amount transferred is excluded from your AGI and satisfying your Required Minimum Distribution (RMD) for the year, effectively allowing you to fulfill your RMD obligation without increasing your taxable income. By transferring money from traditional IRA directly to a qualified charity, you can potentially avoid paying ordinary income tax that would have been due if you withdrew the money from retirement accounts and then donated the cash when you don’t itemize deduction. This effectively “converts” the deduction from AGI to deduction for AGI.

Gifting Assets to Individuals

What are Gifts?

IRC Section 2511(a) broadly defines the scope of taxable “gifts” by stating that the gift tax applies to nearly any transfer of property by an individual. This includes transfers made directly or indirectly, in trust or otherwise, and involving any type of asset (real, personal, tangible, or intangible). The key element for a transfer to be considered a gift under this section is that the donor must have relinquished complete control over the property, and the transfer must be made for less than full consideration (meaning, not for an equal exchange of money or money’s worth).

A gift must first be complete to be considered for gift tax purposes. If it’s incomplete, it’s not a gift subject to tax yet. Once a gift is determined to be complete, the next step is to determine if it’s a present interest or future interest to see if it qualifies for the annual exclusion.

Complete vs. Incomplete Gifts

The concept of a complete vs. incomplete gift hinges on whether the donor has truly relinquished control over the gifted property.

1. Complete Gift: A gift is considered complete when the donor has so completely parted with “dominion and control” over the property that they have no power to change its disposition, either for their own benefit or for the benefit of another.

• Key Characteristics:
• Irrevocable: The donor cannot take the gift back.
• No Retained Control: The donor retains no power to alter, amend, revoke, or terminate the transfer, or to change who benefits from the gift.
  Donor’s Intent: While not the sole factor, there must generally be an intent to make an irrevocable transfer.
• Examples: Handing someone cash, transferring ownership of a stock certificate, or deeding real estate without any strings attached.
• Tax Implications:
• A complete gift is subject to federal gift tax at the time it is made.
• Its value (minus any applicable annual exclusion) reduces the donor’s lifetime gift and estate tax exemption.The transfer is removed from the donor’s taxable estate for estate tax purposes (assuming no other retained interests under estate tax rules).

Relevant IRC Section: Treasury Regulation 25.2511-2(b), which interprets IRC Section 2511, states: “As to any property… of which the donor has so parted with dominion and control as to leave in him no power to change its disposition… the gift is complete.”

2. Incomplete Gift: A gift is incomplete if the donor retains certain powers or control over the transferred property, preventing it from being a fully finalized transfer for gift tax purposes.

• Key Characteristics:
  • Revocable: The donor retains the power to revoke the gift and reclaim the property.
  • Retained Control: The donor might retain the power to change beneficiaries, alter the beneficiaries’ interests, or control the timing and manner of distributions, often within a trust.
  • Examples: Placing assets into a revocable living trust where the donor can take the assets back at any time. Another common example is transferring assets to a trust but retaining a “power of appointment” that allows the donor to decide who ultimately receives the assets, even at death.
• Tax Implications:
  • An incomplete gift is not subject to federal gift tax when the initial transfer occurs, because the donor hasn’t fully relinquished control.
  • It does not reduce the donor’s lifetime gift and estate tax exemption at the time of the transfer.
  • However, because the donor retains control, the assets typically remain includible in the donor’s taxable estate for estate tax purposes upon their death.
  • If the donor later relinquishes the retained power, the gift becomes complete at that later date, and gift tax implications would then arise.
• Relevant IRC Section: Treasury Regulation 25.2511-2(c) states: “A gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title to the property in himself. A gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed or ascertainable standard.”

Present vs. Future Interests

This distinction is crucial because it determines whether a gift qualifies for the annual gift tax exclusion (currently $19,000 per recipient for 2025).

1. Present Interest: A present interest is an unrestricted right to the immediate use, possession, or enjoyment of the property or the income from the property. The donee has immediate access and control over the gifted asset.

• Key Characteristics:
  • Immediate Enjoyment: The donee can use, possess, or receive income from the gift right away, without significant restrictions.
  • Unrestricted Right: The donee’s ability to use or enjoy the gift is not contingent on a future event or the discretion of another person.
  • Examples: Giving cash directly to someone, transferring stock into their name, or deeding a house outright. If you gift money to a trust, and the beneficiary has an immediate and unrestricted right to withdraw the funds (a “Crummey power”), it can convert what would otherwise be a future interest into a present interest for that amount.
• Tax Implications: Gifts of a present interest qualify for the annual gift tax exclusion (IRC Section 2503(b)). This means you can give up to $19,000 (in 2025) to as many individuals as you want each year without using your lifetime exemption or needing to file a gift tax return.

• Key Characteristics:
  • Delayed Enjoyment: The donee cannot immediately access, use, or control the property. Their rights are postponed.
  • Contingent or Conditional: The enjoyment may depend on a future event (e.g., reaching a certain age) or the discretion of a trustee.
    Examples:
    • A gift to a trust where the income or principal can only be distributed to the beneficiary at the trustee’s discretion.
    • A gift to a trust where the beneficiary will receive the principal only upon reaching age 30.
    • Gifting a remainder interest in property, where the donee only gets the property after a life estate ends.
• Tax Implications:
  • Gifts of a future interest do NOT qualify for the annual gift tax exclusion.
  • Even if the value of a future interest gift is less than the annual exclusion amount, it still counts against the donor’s lifetime gift and estate tax exemption, and the donor must report it on Form 709.
• Relevant IRC Section: IRC Section 2503(b) specifically states that the annual exclusion “shall not apply with respect to gifts of future interests in property.” Treasury Regulation 25.2503-3(a) further defines a future interest as “limited to commence in use, possession, or enjoyment at some future date or time.”

Gift Tax Compliance (IRC Chapter 12)

The federal gift tax is imposed on the transfer of property by one individual to another for less than full and adequate consideration while the donor is alive.

• Donor Pays the Tax: The donor (the person making the gift) is generally responsible for paying the gift tax, not the recipient (donee). Generally, the recipient of a gift does not have to pay income tax on the value of the gift. Gifts are excluded from the recipient’s gross income (§ 102).
• Annual Gift Tax Exclusion: An individual can give up to $19,000 per year per recipient in 2025 without triggering any gift tax or using any of their lifetime exemption (IRC Section 2503(b)). These gifts do not need to be reported to the IRS.
  • Gift Splitting: Married couples can elect to “split” gifts (IRC Section 2513), allowing them to give up to twice the annual exclusion amount per recipient (e.g., $38,000 in 2025). This requires consent from both spouses and typically the filing of Form 709.
• Taxable Gifts: Any gift to an individual exceeding the annual exclusion amount in a given year is a “taxable gift.” These gifts reduce the donor’s unified lifetime exemption. Actual gift tax is only paid if the cumulative total of taxable gifts made over a person’s lifetime exceeds their unified exemption.
• Exempt Gifts (Unlimited Exclusions): Certain gifts are completely exempt from gift tax, regardless of amount:
  • Gifts to a U.S. Citizen Spouse: Unlimited marital deduction (IRC Section 2523).
  • Direct Payments for Tuition or Medical Expenses: Payments made directly to an educational institution for tuition or to a medical provider for medical care (IRC Section 2503(e)).
  • Gifts to Qualified Charities: Unlimited charitable deduction (IRC Section 2522).

Important Gift Tax Form: IRS Form 709

• Purpose: The “United States Gift (and Generation-Skipping Transfer) Tax Return” (Form 709) is used by donors to report gifts that exceed the annual exclusion amount, gifts of “future interests,” or gifts subject to GST tax.
• Filing Requirement: Even if no gift tax is owed due to the lifetime exemption, Form 709 must be filed to report taxable gifts and track the use of the unified exemption.
• Deadline: Generally due by April 15 of the year following the gift.

Basis of Gifted Property (§ 1015):

When you receive property as a gift, your basis in the property depends on whether the property’s fair market value (FMV) at the time of the gift was greater than or equal to the donor’s adjusted basis.

• FMV >= Donor’s Basis: In this case, your basis is generally the same as the donor’s adjusted basis (carryover basis).
• FMV < Donor’s Basis: For purposes of determining a loss on a later sale, your basis is the FMV at the time of the gift. For determining gain, your basis is the donor’s adjusted basis. This rule prevents the shifting of unrealized losses.

Unified Transfer Tax System-Gift and Estate Taxes

The Unified Transfer Tax System is the federal framework that imposes taxes on the transfer of wealth, whether it occurs during a person’s lifetime (via gifts) or at their death (via their estate). This system unifies the federal gift tax and the federal estate tax, meaning that there is a single, combined exemption amount that applies to all taxable transfers made throughout a person’s life and at their death.

Key Concepts of the Unified Transfer Tax System

• Unified Credit / Lifetime Exemption: This is the cornerstone of the system. A single credit (equivalent to an exemption amount) applies to the cumulative total of taxable gifts made during a person’s lifetime and the value of their estate at death. For 2025, this unified exemption amount is $13.99 million per individual (under IRC Section 2010).
  • Any portion of this exemption used to offset gift tax liability during life reduces the amount available to offset estate tax at death.
  • Sunset Provision: The high exemption amounts established by the Tax Cuts and Jobs Act (TCJA) are temporary. Unless Congress acts, the exemption is scheduled to revert to approximately $7 million per individual in 2026 (adjusted for inflation). This impending change is a major driver of current estate planning strategies.
• Progressive Tax Rates: Amounts exceeding the unified exemption are subject to a progressive tax rate schedule, with the top federal rate currently at 40% (under IRC Section 2001 for estate tax and IRC Section 2502 for gift tax).
• Generation-Skipping Transfer (GST) Tax: A separate, additional flat tax (currently 40% for 2025) under IRC Chapter 13. It prevents avoidance of estate and gift taxes by transferring wealth to beneficiaries more than one generation younger than the transferor (e.g., grandparent to grandchild). The GST tax has its own exemption, generally equal to the unified gift and estate tax exemption.

Estate Tax Compliance (IRC Chapter 11)

The federal estate tax is a tax on the right to transfer property at death. It is calculated on the value of the “gross estate” (all assets the decedent owned or controlled at death), reduced by allowable deductions, to arrive at the “taxable estate.”

• Gross Estate: Includes all property (e.g., real estate, financial accounts, life insurance proceeds if the decedent owned the policy, retirement accounts, business interests, and certain transfers made within three years of death).
• Deductions from the Gross Estate:
  • Funeral and Administration Expenses: Reasonable costs of administering the estate.
  • Debts of the Decedent: Outstanding liabilities.
  • Marital Deduction: An unlimited marital deduction (IRC Section 2056) for transfers to a surviving spouse who is a U.S. citizen. This allows for tax deferral until the second spouse’s death.
  • Charitable Deduction: An unlimited charitable deduction (IRC Section 2055) for transfers to qualified charitable organizations.
• Taxable Estate: The gross estate minus allowable deductions. The unified credit is then applied against the tentative estate tax.
• Portability: For married couples (IRC Section 2010(c)), this allows the executor of a deceased spouse’s estate to transfer any unused portion of their unified exemption (the Deceased Spousal Unused Exclusion, or DSUE) to the surviving spouse. This can effectively double the exemption for a couple. Portability must be elected on a timely filed Form 706.

Important Estate Tax Form: IRS Form 706

• Purpose: The “United States Estate (and Generation-Skipping Transfer) Tax Return” (Form 706) is filed by the executor of a decedent’s estate to calculate and report any federal estate tax due.
• Filing Requirement: Form 706 must be filed if the decedent’s gross estate, plus any adjusted taxable gifts made during life, exceeds the unified exemption amount for the year of death. It is also filed to elect portability for a surviving spouse, regardless of the estate’s size.
• Deadline: Generally due nine months after the date of the decedent’s death, with a six-month extension usually available by filing Form 4768

Basis of Inherited Property (§ 1014):

Under IRC Section 1014(a)(1), the basis for the heir is the fair market value (FMV) of the property on the date of the decedent’s death.

Key exceptions and details:

• Alternate Valuation Date: An estate executor can elect to use the FMV six months after death instead, under IRC Section 1014(a)(2) and IRC Section 2032, if it lowers both the estate value and estate tax.
• Property Gifted Before Death: An anti-abuse rule (IRC Section 1014(e)) prevents a step-up if appreciated property was gifted to the decedent within one year of death and then inherited back by the original donor.
• Income in Respect of a Decedent (IRD): Items like IRA balances or unpaid wages (IRC Section 691) do NOT get a step-up in basis; the heir pays income tax on them.
• Community Property: In community property states, both halves of community property generally receive a full step-up at one spouse’s death (IRC Section 1014(b)(6)).