BY BRITTANY RAZZANO, ESQ.
What is a capital gain? Generally, a capital
gain results from a sale of an asset, such as a
stock, at a higher price than the owner originally
paid. What the owner paid for the asset
is known as the cost basis. If the sale price
is higher than the cost basis, the difference
between the two is a capital gain.
A long-term capital gain is a gain resulting
from a holding period of more than one year.
For most taxpayers, a long-term capital gain
is taxed at 15 percent (20 percent for the top
tax bracket). A short-term capital gain is a
gain resulting from a holding period of 12
months or less. A short-term capital gain is
taxed as ordinary income, which varies depending
on the taxpayer’s income tax bracket.
Beyond the basics of capital gains tax rules,
we must consider the effects of gifting and
inheriting capital assets. When considering
these events, we must also think about the
possible gift tax and estate tax ramifications.
The current federal annual gift tax exclusion
amount is $14,000 per person.
This means that a donor can give each
person $14,000 per year without having to
pay or report any gift taxes. If the donor is
married, they can give away $28,000 per year
per person. It is important to note that while
for tax purposes, a gift of $14,000 or less is
disregarded, such a gift may be considered a
transfer that could trigger a penalty period
for a Medicaid look-back period, if the donor
has to go into a nursing home within five years
of making the gift.
If a donor gifts more than the annual gift
tax exclusion amount, that donor is obligated
to file a gift tax return (IRS Form 709) to report
the excess above the exclusion amount.
For example, a widow gives her son $20,000
in one calendar year. She must file a gift tax
return and report $6,000 (the excess above
the exclusion amount). She will not owe any
taxes on making the gift and the son will
not owe any taxes for receiving the gift at
However, if the widow passes away with
more than the federal estate tax exclusion
amount, that gift, along with any other reportable
gifts that she made during her lifetime,
will be included in her gross estate for
federal estate tax assessment purposes. The
current federal estate tax exclusion amount
is $5.43 million. This amount is adjusted
annually for inflation. In general, there is no
gift tax in New York. The current New York
estate tax exclusion amount is $3,125,000
until April 1, 2016, when it will be increased
to $4,187,500 until April 1, 2017, when it will
be increased to $5.25 million.
The most common capital asset that is
gifted or inherited is stock. Many older people
wish to gift their assets to their loved ones
while they are still alive to see it. This may not
be a good idea for tax purposes or for longterm
care and Medicaid planning purposes.
The concepts of carryover basis and
stepped-up basis are the key focus to the capital
gains planning discussion surrounding
the comparison of gifting versus bequeathing
(i.e., naming someone in your will). For
tax purposes, if someone gifts a capital asset
during their lifetime, the recipient steps into
the donors shoes and takes their basis. This
is known as carryover basis. In contrast, if
someone inherits a capital asset they receive
a stepped-up basis in the asset as of the date
The easiest way to illustrate this is with
an example. Let’s assume that the capital asset
is 1,000 shares of stock with a cost basis
of $5 per share (total cost basis of $5,000).
The stock is worth $25 per share today (total
value of $25,000). If a donor gifts the stock
while she is alive, the recipient will take her
basis of $5 per share, which means that if the
recipient were to sell the stock, they would
incur a capital gain of $20,000, resulting in
a $3,000 capital gains tax.
If that same donor passes away and the
recipient inherits the stock, they will receive
a stepped-up basis to $25 per share (the value
on the date of death). If the recipient were to
sell the stock for $25 per share, they would
not owe any capital gains tax as a result of
the stepped-up basis. It is important to note
that there are variations of basis step-up adjustments
that result from joint ownership,
depending on the relationship of the joint
owner to the decedent. If capital gains tax
is the only consideration when determining
whether it is best to gift or bequeath, the
step-up in basis is a significant advantage.
With the holidays approaching, you may
have questions about what’s right for your
situation, to gift or not to gift? As discussed,
tax is not the only factor that should be considered
when making this determination.
It is important to consult with your estate
planning attorney, in conjunction with your
financial advisor and accountant, before
making gifting decisions.
Razzano is an associate with the Herzog
Law Firm in Saratoga Springs.