How to Reduce Taxes by Gifting, from an Accountant in Scottsdale, Phoenix, and Paradise Valley

HOW TO REDUCE YOUR INCOME TAXES BY GIFTING TO YOUR CHILDREN OR PARENTS By Jeffrey Brooks – CPA. Please consult with your professional tax CPA regarding your specific circumstances!

You 25 year old adult child is having trouble financially so you gift cash to help her out. Did you know that this is not a smart tax strategy?

Instead, you could gift your businesses furniture, fixtures and equipment or cash to buy assets and your daughter could charge your business a fair market value rent and report the taxable income at her lower tax rate.

However, there are assets that you should not gift to your child. If you bought a SUV for $60,000 that is worth $40,000 but has been depreciated down to $21,000, gifting this asset would result in the triggering of recapture taxable income for you of more than the $19,000 ($40,000 less $21,000). When you dispose of assets that you took Section 179 “fast depreciation” and 50% bonus depreciation, you have to recapture the depreciation to the extent that the asset would have been depreciated over the longest time frame or life using the ADS Alternative Minimum Tax method! By gifting to your daughter the business use of the vehicle goes below 50% (actually 0%). 

The recapture tax could be as much as $20,000!

The recapture tax normally affects what is called “listed property” like a vehicle and computer located at your home that my definition can have both personal and business use.

When these “listed” properties are gifted to your child, you need to recapture part of the depreciation you used by calculating the depreciation using the ADS statutory life used for alternative minimum tax purposes (longest life), and for nonlisted property is the MACRS statutory life used for regular tax purposes (shortest life).

So, the best thing to do is ALWAYS check with your professional tax CPA to avoid an unpleasant surprise.

Another common mistake is gift an asset that would result in a tax deductible loss if it was sold. By gifting the asset, you lose the tax savings from a tax deductible loss!

Clients think that there is a tax deduction by gifting a business asset to a relative. Unfortunately that is not true. However, if the fair market value of the asset exceeds $14,000, the excess over $14,000 can result in an increase in estate tax after you pass on. However, estate taxable life time exclusion for married couples is close to $10.5 million so most of us do not have to worry about an estate tax.

So, let us say you gifted $50,000 of furniture, fixtures and equipment in one year. If you are married and your daughter is married, you could avoid having to reduce the $10.5 million lifetime exclusion. You and your spouse could each gift $14,000 each to your daughter and son-in –law or a total of $56,000 so the $50,000 would not reduce the estate lifetime exclusion.

But let us be practical. If your estate assets are $500,000, you and your spouse could gift the $50,000 to your daughter and $28,000 would be allowed ($14,000 each) and the $22,000 ($50,000 less $28,000) would reduce the lifetime exclusion of $10.5 million. This isn’t a problem because your assets are way under the $10.5 million.

Remember when you gift business assets, your daughter’s basis for future depreciation is the lower of basis or fair market value. If the undepreciated basis of $46,152 is less than the $50,000 fair market value, your daughter’s basis in your business furniture, fixtures and equipment is $46,152 not $50,000.

If your daughter was a full time student who gets half her support from you, all of the taxable income from renting your business assets to your business would be taxed at your high tax bracket.

This is called the “Kiddie Tax” Problem. Prior to 2008, the “Kiddie Tax” at the parent’s rate was only on kids up to age 17.

Beginning in calendar year 2008 for calendar-year taxpayers, lawmakers expanded the kiddie tax to include full-time students under the age of 24 who did not have earned income that was more than half their support.

If you give a business asset to a child to whom the kiddie tax applies and then the child sells that asset, the kiddie tax applies the parent’s tax rate to that sale. Therefore, you gain no income-splitting tax benefits at the federal level when you make a gift to a child who is subject to the kiddie tax.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com