Can You Offset Capital Gains Tax With Gifting to Heirs?
Your capital gains are subject to the income tax, whereas the gifts of cash and property you make to your heirs are subject to the gift tax. As a result, you cannot offset capital gains by gifting to your heirs. However, it’s possible to avoid the capital gains tax altogether if you make gifts of capital asset property to your heirs.
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Capital Asset Rules
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The capital gains tax applies to the personal and investment property you sell at prices higher than your tax basis. Moreover, the only way to offset your capital gains is with other capital losses. This is because the IRS allows you to combine your capital gains with losses from the current and prior tax years to arrive at a net capital gain or loss. Without sufficient capital losses, the only way to eliminate the possibility of paying capital gains tax is to transfer ownership of your capital assets to other taxpayers, such as your heirs, thereby eliminating your obligation to report it on your tax return.
Gifting to Heirs
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Gifting capital assets, such as your homes and automobiles, to heirs is only effective if your intention is to provide them with the assets at some point in the future anyway. Once you make the gift, you are no longer the owner and aren’t responsible for paying capital gains when your heirs sell the property. However, in order to accomplish your goal of reducing your tax burden, you must ensure that you make the gifts without incurring a separate gift tax liability.
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Use Annual Exclusion
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You can make as many gifts as you like during the year without incurring a tax liability provided the total value of all gifts you make during the year to each recipient doesn’t exceed the annual exclusion. The annual exclusion tends to increase every few years, and the exclusion amount in 2011 is $13,000. Assuming you make gifts of capital assets in a year the exclusion is $13,000, this allows you to transfer up to $13,000 worth of property to each heir without incurring a gift or capital gains tax. If the value of all gifts you make to an heir exceeds this amount, you must report it on Form 709. However, you can use your unified credit to eliminate gift tax on the excess gift values.
Unified Credits
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Each taxpayer receives a one-time unified credit of $1 million that he can use to eliminate gift tax on gifts he makes in excess of the annual exclusion. There is no limit to the number of years you can use the credit, but every time you do, you must reduce the available balance. For example, suppose you provide your heir with a vacation home worth $250,000. The annual exclusion covers the first $13,000, but you can use your unified credit to eliminate the gift tax on the remaining $237,000. This eliminates all gift tax and also prevents you from having to pay capital gains tax when the home is sold.
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