Gift

A gift is a transfer of property or money to another person for less than full value, made from generosity rather than as payment for anything. In everyday use the word describes an occasion. In law it describes two separate questions with two separate answers: whether the transfer produces taxable income for the person receiving it, which is governed by section 102 of the Internal Revenue Code, and whether the transfer produces a filing obligation for the person making it, which is the gift tax and belongs to a different chapter of the same code.

This page is about the transfer and the position of the person who receives it. The annual per-recipient exclusion, Form 709 and the lifetime exclusion belong to the gift tax, and the reset of cost basis that happens at death belongs to step-up in basis. The one-line answer most readers are looking for is that receiving a gift is not a taxable event: section 102(a) says that "gross income does not include the value of property acquired by gift, bequest, devise, or inheritance," which is a single sentence covering both a lifetime gift and an inheritance.

The two tests for the same word, and why they point in opposite directions. For gift tax purposes the giver's state of mind does not matter: the IRS applies the tax whether or not the donor intended the transfer to be a gift, which is how a below-market sale to a family member becomes one. For income tax purposes the giver's state of mind is the entire question. The Supreme Court held in Commissioner v. Duberstein, 363 U.S. 278 (1960), that a gift in the statutory sense "proceeds from a detached and disinterested generosity," out of "affection, respect, admiration, charity or like impulses," and that "the most critical consideration" is the transferor's intention. A payment made from "the constraining force of any moral or legal duty," or in anticipation of an economic benefit, is not a gift however the parties label it. The Court was equally clear that the label is not decisive in the other direction: "there must be an objective inquiry as to whether what is called a gift amounts to it in reality," and something that is a gift at common law is "not necessarily a gift within the meaning of the statute."

The employer carve-out, which is the rule that catches people. Section 102(c) states that the exclusion "shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee." There is no small-amount tolerance in that sentence. A holiday cash bonus, a gift card, a wedding present in cash from the firm: all of it is wages unless it fits a different statute, and the two the code itself points at are employee achievement awards under section 74(c) and de minimis fringe benefits under section 132(e), neither of which reaches cash or a cash equivalent. The generosity may be entirely genuine. The tax treatment does not turn on that.

What the gift produces is taxed, even though the gift is not. Section 102(b) removes the income from gifted property from the exclusion, and also removes a gift that consists of the income from property rather than the property itself. So a transferred rental house arrives untaxed and its rent is taxable from the first month; a transferred bond arrives untaxed and its interest is reportable. This is the distinction that decides whether a transfer moves a tax bill or merely moves an asset.

Basis follows the giver, and that is the load-bearing difference between giving now and leaving later. Under section 1015 the recipient of a gift generally takes the giver's cost basis and the giver's holding period, so the unrealized gain travels with the asset and is taxed when the recipient sells. Property that passes at death is instead revalued, so the gain accumulated during the owner's life is never subject to income tax. That asymmetry pushes readers toward an obvious strategy, and there is an anti-abuse rule waiting at the end of it: section 1014(e) denies the revaluation where appreciated property was gifted to the person who died within one year of their death and passes back to the donor or the donor's spouse. The gift tax page carries the mechanics of both rules, including the trap on a loss position.

"Gifting moves assets out of your estate" is loose, and the correction is worth knowing. Section 2001(b) computes the estate tax on the taxable estate plus the decedent's post-1976 adjusted taxable gifts, so a taxable lifetime gift is added back at the value it had when it was made. What leaves the transfer tax system is the growth after the gift, not the gift. For a large estate that is a real benefit; it is simply not the benefit the shorthand describes.

The consequences that have nothing to do with tax, and usually matter more. A completed gift is irrevocable, so money given to an adult child is that child's money, reachable by that child's creditors and divisible in that child's divorce. An outright gift to someone who receives income-tested or asset-tested benefits can cost them those benefits, which is the reason such transfers are usually routed through a trust instead. And an agent acting under a power of attorney generally cannot make gifts from the principal's assets unless the document says so expressly, because the Uniform Power of Attorney Act treats the gifting power as one that has to be granted rather than assumed.

What happens, in order, when someone gives property away during life.

1. The transfer is completed. The giver parts with dominion over the property. Until that happens there is no gift, only an intention to make one, and an intention is not enforceable.

2. The recipient reports nothing. Section 102(a) excludes the value received from gross income. No form, no line on the return, no tax.

3. Basis and holding period carry across. The recipient inherits the giver's cost figure and the giver's clock, so a long-held position stays long-term in the recipient's hands.

4. The giver considers whether a return is due. That is the gift tax question, and for most transfers the answer is that nothing is required.

5. Income from the property is taxed to whoever now owns it. From the date of the gift onward, the dividends, interest or rent belong to the recipient and appear on the recipient's return.

A hypothetical example of the basis point. Priya bought stock years ago for $20,000. It is now worth $90,000. She gives it to her son, who sells it a month later for $90,000. His basis is her $20,000, so he reports a $70,000 long-term capital gain. Had he inherited the same stock instead, his basis would have been its value at her death, and a sale at that value would have produced no gain at all. Nothing about the gift itself was taxable to him; the entire tax consequence sat in the basis he took with it.

Pros

• The recipient owes no income tax on what they receive, and reports nothing.
• Value transferred during life is out of the giver's hands immediately, so the growth after the transfer accrues to the recipient rather than to the giver's estate.
• A lifetime transfer can be watched: the giver sees how the money is handled and can adjust what they do next.
• For most people the transfer is administratively trivial, with no filing on either side.

Cons

• It cannot be undone. A gift made to solve one problem cannot be recalled when a different problem appears.
• The unrealized gain travels with the asset, so the recipient inherits a tax bill that would have disappeared had the same asset passed at death.
• An outright gift can disqualify a recipient who depends on income-tested or asset-tested benefits.
• Once given, the property is exposed to the recipient's creditors, divorce and judgment.
• Where an employer is the giver, the exclusion does not apply at all, and the value is taxed as wages.