Gifts & Inheritances
This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Are gifts, bequests, or inheritances taxable?
Generally, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rentals, that income is taxable to you. For additional information, refer to Publication 17 (PDF), Your Federal Income Tax, Chapter 13. If you inherit an Individual Retirement Arrangement (IRA) or proceeds from a retirement (pension) plan, special rules apply. Refer to Publication 590 (PDF), Individual Retirement Arrangements (IRAs), or Publication 575 (PDF), Pension and Annuity Income, for further information.
References: 10.1 Captial Gains, Losses/Sale of Home: Property (Basis, Sale of Home, etc.) What is the basis of property received as a gift?
To figure the basis of property you get as a gift, you must know its adjusted basis to the donor just before it was given to you. You also must know its fair market value (FMV) at the time it was given to you. If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or loss when you dispose of the property. Your basis for figuring gain is the same as the donor's adjusted basis, plus or minus any required adjustments to basis while you held the property. Your basis for figuring a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to basis while you held the property. See Adjusted Basis in Publication 551 (PDF), Basis of Assets.
If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain or loss on the sale or disposition of the property.
If the FMV is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Also, for figuring gain or loss, you must increase or decrease your basis by any required adjustments to basis while you held the property. See Adjusted Basis in Publication 551, Basis of Assets.
If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. However, do not increase your basis above the FMV of the gift at the time it was given to you.
If you received a gift after 1976, increase your basis by the part of the gift tax paid on it that is due to the net increase in value of the gift. Figure the increase to basis by multiplying the gift tax paid by the following fraction. The numerator of the faction is the net increase in value of the gift and the denominator is the amount of the gift.
The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. The amount of the gift is its value for gift tax purposes, after reduction by any annual exclusion and any marital or charitable deduction that applies to the gift. For more information on the gift tax, please see Publication 950 (PDF), Introduction to Estate and Gift taxes.
References: 10.2 Captial Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders) I received stock as a gift from my grandparents. I am selling the stock this year. How can I figure the basis of the gifted stock?
To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its fair market value (FMV) at the time it was given to you, and any gift tax paid on it.
If the FMV of the property was less than the donor's adjusted basis, your basis for figuring gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustment to basis during the period you held the property. Your basis for figuring loss on its sale or other disposition is its FMV at the time you received the gift plus or minus any required adjustment to basis during the period you held the property.
If the FMV of the property was equal to or greater than the donor's adjusted basis, your basis for figuring gain or loss on its sale or other disposition is the same as the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of the gift.
For further complete information, refer to Publication 17 (PDF), chapter 14, Basis of Property.
References: 12.7 Small Business/Self-Employed/Other Business: Income & Expenses Are business gifts deductible?
If you give business gifts in the course of your trade or business, you can deduct the cost subject to special limits and rules. In general, you can deduct no more than $25 for business gifts you give directly or indirectly to any one person during your tax year. Exceptions may apply. For additional information, refer to Tax Topic 512 and Chapter 28 of Publication 17 (PDF), Your Federal Income Tax.
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