Gift Inheritance Tax

Gifts

Generally, gifts are excluded from one’s taxable income. For example, if a mother earns $100,000 in a year and gives her son $20,000 a year out of love, the gift to her son is not considered income for her son and, so, the mother does not have a deduction for federal income tax purposes. However, a gift tax may still be levied on the donor. As of 2025, the annual gift tax exclusion is $19,000 and the lifetime gift tax exclusion and estate tax exemption is $13.99 million. This means that one can gift up to $19,000 to a person per year and not have to pay a tax on the gift. There are exceptions to this rule such as tuition payments and medical expenses if such funds are paid directly to the provider.

Take for another example that the mother transfers certain stock to her son while she is alive. When the son acquires that property, the built-in gain from the stocks will not be forgiven.  The gain instead will be reflected in the son’s measure of gain when he ultimately sells the stocks received as gift. Generally, the son will use his mother’s basis when he sells, which is typically what she bought it for. Therefore, his taxable income from the sale of the stocks will be the cost of what he sells it for minus what his mother originally paid for the stocks.

Inheritance

The rules regarding inheriting property by reason of death are a little different. As opposed to gifts where the recipient takes the transferer’s basis, a recipient’s basis in inherited property will be the fair market value of the property on the date of death of the deceased person. Using the same example as above, this means that the son will receive his mother’s “stepped up” basis, meaning that the son will take the property at the value as of his mother’s death rather than as of her purchase.. This can lead to forgiveness of the capital gains income tax on the gain.

The Benefits of Holding onto Property till Death

The stepped-up basis received at inheritance allows someone inheriting property the opportunity to escape capital gains income taxation, which is not available if the property is received as a gift during the lifetime of the donor. If someone receives a gift, they will have to account for the gain related to the property when they ultimately engage in a sale or disposition.

Regardless of how you receive property, the value of the property may still be subject to an estate tax. As stated above, the current threshold for estate taxes is $13.99 million. The estate tax will apply without regard to previously unrealized appreciation. An individual who sells property before death pays income tax on any gain plus estate tax on the property remaining in the estate after payment of the income tax. On the other hand, an individual who holds onto property until death pays only the estate tax.

If you have any questions or want assistance with information relating to tax implications on transferring property or making gifts, please reach out to one of our attorneys at McNeelyLaw LLP by calling (317)825-5110.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.