McKee Financial

McKee's Weekly Newsletter 1-4-2021

Gift vs. Inheritance: Consider the Tax Difference

Most people do not pay income tax on assets they inherit, but if they later sell inherited assets such as appreciated securities and real estate, they may owe tax on the capital gains. The capital gain or loss is the difference between the selling price and the asset’s basis.

Thus, the basis can be an important factor when deciding whether you should gift assets now or transfer them to heirs at your death.

Capital Gains Taxes

Capital gains and losses are classified as short term or long term, depending on how long you own the asset. A holding period of one year or less is short term; more than one year is long term. Inherited property is considered long term regardless of how long you own it. Short-term capital gains are taxed as ordinary income, whereas long-term gains are taxed at rates ranging from 0% to 20%, depending on taxable income.

2021 taxable income thresholds for long-term capital gains

Tax rate                                 Single filers                                        Married joint filers

0%                                         Up to $40,400                                      Up to $80,800

15%                                       $40,401 to $445,850                            $80,801 to $501,600

20%                                       More than $445,850                             More than $501,600

Because capital gains are included in net investment income, some taxpayers may also be subject to the 3.8% net investment income tax if their modified adjusted gross income exceeds $200,000 (single filers) or $250,000 (joint filers). Gains from certain assets, including coins, art, and other collectibles, may be taxed at higher rates.


What’s the Basis?

Your basis in an asset is generally equal to the purchase price plus associated expenses (such as taxes and commissions on the transaction). Basis in real property may be adjusted upward for the cost of capital improvements or downward for depreciation taken for tax purposes and insurance reimbursements for casualty losses or theft.

If you are thinking about giving highly appreciated assets to your children, keep in mind that your basis will carry over with the gift. Let’s say you bought shares of an investment for $50,000 (your basis) 20 years ago and they are worth $150,000 today. You would realize a capital gain of about $100,000 if you were to sell the shares.

If you give the shares to your children during your lifetime, they would keep the same $50,000 basis. When your children sell the shares, they could face substantial capital gains taxes — for the gains during your lifetime plus any additional gains that occur after they receive the gift.

However, if you leave the assets to your children in your estate, their basis will step up to the value at the time of your death. Your heirs would be liable only for taxes on any capital gains above the stepped-up basis, effectively erasing all capital gains that occurred during your lifetime.

Gift Tax and Other Factors

In addition to the potential for a stepped-up basis on inherited assets, you might consider the following when deciding whether to gift highly appreciated assets to your children or other family members.

Will making gifts reduce your combined gift and estate taxes? Gifted property is removed from your gross estate for federal estate tax purposes. A 40% tax rate applies to taxable estate assets exceeding the lifetime estate and gift tax exclusion ($11.7 million for individuals and $23.4 million for married couples in 2021; indexed annually for inflation). This high threshold could fall if the government needs to raise tax revenues in the future. Any gift over the annual exclusion amount ($15,000 for individual gifts or $30,000 for joint gifts) must be reported on a gift tax return, and it decreases the lifetime exclusion.

Does the recipient need the gift now, or can it wait? Could you gift cash or other property that would not trigger capital gains tax instead?

What tax rate might apply to capital gains on the sale of the asset? For example, if you or the recipient would pay a 0% rate on capital gains, there may be no benefit to waiting for a step-up in basis. On the other hand, if the recipient would be subject to a higher tax rate, you could gift the asset or sell it yourself and gift the cash proceeds.



Interesting Economic Facts


BOND INDEX - The taxable bond market was up +7.5% in 2020 (total return) and has gained +7.6% per year (total return) over the last 40 years (1981-2020). The Bloomberg Barclays US Aggregate Bond Index (created in 1986), calculated using publicly traded investment grade government bonds, corporate bonds and mortgage-related bonds with at least 1 year until final maturity, was used as the bond measurement. The index is a major benchmark for US bond investors (source: Bloomberg Barclays).


MOST OF THE TIME - The +7.5% total return for Bloomberg Barclays US Aggregate Bond Index in 2020 follows its +8.7% gain in 2019, the best “back-to-back” years for the index since 2001-2002. The widely followed bond index, created in 1986 with backdated history calculated to 1976, has produced a negative total return for the calendar year in just 3 years of the last 40 years, i.e., in 1994, 1999 and 2013 (source: Bloomberg Barclays).


JOBLESS - The lowest (3.5%) and the highest (14.7%) unemployment rates in the United States in the last 50 years (since 1970) both occurred in 2020, and they took place just 2 months apart (source: Department of Labor).


BIRTHS, DEATHS AND IMMIGRATION - Between 7/01/19 and 7/01/20, the Census Bureau estimated that the US population grew by just +0.35%, i.e., approximately one-third of 1% growth rate between 2019-2020. That’s the lowest year-over year growth rate in the USA based upon records maintained since 1900 or 120 years of data (source: Census Bureau).


LIVING LONG - The life expectancy at birth of an American baby in 1971, i.e., 50 years ago, was 71.1 years. The life expectancy at birth of an American baby today is 78.7 years. Thus, life expectancy in the United States has increased 7.6 years over the last half-century, i.e., American life expectancy at birth is increasing at the rate of 1 ½ years every decade (source: Center for Disease Control).


TEN-YEAR TREASURY NOTE - The yield on the 10-year Treasury note ended 2020 at 0.91%, its lowest calendar year close ever and down 1 percentage point from its 12/31/19 close of 1.91%. The 10-year Treasury note yield was 0.50% on Monday 3/09/20, its lowest closing yield ever. 10-year notes have been traded in the USA since 1790, i.e., 230 years of trading (source: Treasury Department).


HOUSING - The average interest rate nationwide on a 30-year fixed-rate mortgage was 2.76% at the end of 2020. The all-time record low national average is 2.66%, set just 1 week earlier on 12/24/20 (source: Freddie Mac).


OIL PRICES - The price of oil ended 2020 at $48.52 a barrel, down 20.5% from its 2019 close of $61.06 a barrel. Oil’s all-time closing high price is $147.27 a barrel as of 7/11/08 (source: CME Group).


OVERSPENDING - The national debt of the United States was $27.56 trillion as of the close of business on Wednesday 12/30/20, an increase of $4.36 trillion during the calendar year 2020 (source: Treasury Department).


...and for the History Lovers... This Week in History


January 4, 2004

NASA Mars rover Spirit successfully lands on Mars.


January 5, 1952

Prime Minister Winston Churchill arrives in Washington to confer with President Harry S. Truman.


January 6, 1921

The U.S. Navy orders the sale of 125 flying boats to encourage commercial aviation.


January 7, 1990

Safety concerns over structural problems force the Leaning Tower of Pisa to be closed to the public.


January 8, 1982

AT&T agrees to divest 22 subdivisions as part of an antitrust agreement.


January 9, 1924

Ford Motor Co. stock is valued at nearly $1 billion.


January 10, 1901

Ford Motor Co. stock is valued at nearly $1 billion.



Notable Dates in December


  • January 1 is New Year’s Day. While you’re still recuperating from the prior night’s parties, read about some other new year’s traditions you might not know about and celebrate with some Hoppin’ John for good luck.
  • January 5 brings Twelfth Night, an English folk custom that marked the end of Christmas merrymaking, and in ancient Celtic tradition, the end of the 12-day winter solstice celebration. On Twelfth Night, it was customary for the assembled company to toast each other from the wassail bowl.
  • January 6 is Epiphany. According to the New Testament’s Gospels, on this date the Magi—the three wise men or kings—venerated and brought gifts to the infant Jesus. Bake a King Cake with a lucky bean inside!
  • January 17 is Benjamin Franklin’s birthday. He was not only a world-renowned statesman, inventor, and scientist, but was also fascinated by agriculture. Here at the Old Farmer’s Almanac, we consider him the father of almanacs! How much do you know about Ben? 
  • January 18 is Martin Luther King Jr. Day (observed). This holiday is held on the third Monday in January and honors the principles of this civil rights leader and Nobel Prize Winner dedicated to nonviolence.
  • January 20 is Inauguration Day, which is the day that the next U.S. president is sworn into office.


“Just for Fun” January days

January is National Clean Up Your Computer Month and National Hot Tea Month! Here are some more fun things to celebrate in January:

  • January 1: Z Day (On this day, those whose last name begins with “Z” get to go first instead of last.)
  • January 3: National Chocolate-Covered Cherry Day
  • January 6: National Bean Day
  • January 8: Elvis Presley’s Birthday
  • January 10: National Houseplant Appreciation Day
  • January 14: National Dress Up Your Pet Day
  • January 20: National Penguin Day
  • January 22: National Answer Your Cat’s Questions Day
  • January 29: National Puzzle Day



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