Have you ever heard the saying “it’s better to give than to receive”? When it comes to taxes, that’s not always true. Before you rush to give away your valuable assets to your children or grandchildren, let’s break down why waiting might save your family a bundle in taxes.
The Magic of the “Step-Up”: A Tax Gift from the IRS
When someone passes away, something almost magical happens to their assets – they get what’s called a “step-up in basis.” In plain English, this means the value of assets like houses, stocks, or family businesses gets reset to their current market value for tax purposes. This reset can save your heirs thousands or even millions in taxes. However, this step-up only occurs when you have properly planned.
Let’s look at some examples
Example 1: The Family Stock in Apple
Imagine you bought $10,000 worth of Apple stock back in 2000; and today it’s worth $500,000.
If you gift this stock to a loved one while you are alive:
– Your loved one gets your $10,000 “basis” (original purchase price)
– When they sell: They’ll owe taxes on $490,000 of gain
– Tax bill: About $116,620 (23.8% federal capital gains tax in 2024)
If you hold on to the stock during your life and then your loved one inherits it after your death:
– They get a new “basis” of $500,000
– When they sell: $0 in taxes
– Capital gains tax saved: $116,620
Example 2: A Massachusetts Family Home
Let’s say you bought your Newton home in 1985 for $200,000, and now it’s worth $1.5 million.
If you gift the home to your child during your lifetime:
– Your daughter takes the home with your $200,000 basis
– When she sells: $1.3 million gain
– Federal tax bill: About $309,400 (23.8%)
– Massachusetts tax bill: $65,000 (5% state capital gains tax)
– Total capital gains tax hit: $374,400 (based on 2024 tax rates)
If instead, you leave your home to your child at the time of your death:
– The tax basis will be “reset” to the home’s value at the time of your death: $1.5 million
– Taxes on sale: $0
– Capital gains tax savings: $374,400
Massachusetts Special Considerations
Massachusetts residents need to know:
– Massachusetts has an estate tax that kicks in at just $2 million – much lower than the federal limit; but Massachusetts estate tax rates start at just 0.8% and max out at 16%
– Massachusetts capital gains tax is a flat 5% in addition to the federal rates that can be as much as 23.8%
Example 3: A Mixed Massachusetts Estate
Another imaginary scenario is that you have a $3 million estate made up of:
– House worth $1.2 million (purchased for $300,000)
– Stocks worth $800,000 (purchased for $100,000)
-Retirement savings of $1,000,000
Massachusetts estate tax would be $82,400 if you keep everything until death. But if you gifted the house and stock to your heirs during life, they could face:
– House capital gains: $900,000 × 28.8% = $259,200
– Stock capital gains: $700,000 × 28.8% = $201,600
– Total tax hit: $460,800
In this case, even with Massachusetts estate tax, keeping the assets saves the family about $378,400 in taxes.
When Should You Still Consider Gifting?
Despite these tax advantages, gifting might make sense when:
- Your estate is very large (over $13.61 million federally)
- You’re giving assets that haven’t grown much in value
- You’re giving assets likely to grow a lot in the future
- You want to help your kids now, regardless of taxes
- You’re making annual exclusion gifts ($18,000 per person in 2024)
Simple Steps to Take Now
- Make a List: Write down your valuable assets and what you paid for them
- Check Values: Get rough current values for these assets
- Do the Math: Calculate potential capital gains (current value minus purchase price)
- Consider Timing: Think about when your family might need these assets
- Get Help: Talk to a tax professional about your specific situation
The Bottom Line
Don’t let the desire to avoid estate taxes push you into giving away assets too soon. Sometimes, the kindest gift you can give your family is waiting. The tax savings from the step-up in basis often far outweigh any estate tax concerns, especially for Massachusetts families with estates under $13.61 million.
*Important Note: This is general information only. Tax laws change frequently, and your situation may have special factors to consider. Always consult with qualified tax and legal professionals before making major financial decisions. *
