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Let's start by reviewing the federal gift exclusion and exemption. The gift exclusion allows a person to gift another person $16,000 per year without having to file a gift tax return. The gift exemption for 2022 is $12.06 million per person. That is, you can gift up to $12.06 million over your lifetime and not pay any tax. Keep in mind that gift and estate are coupled, so using your gift exemption lowers the estate exemption. Gifts to spouses fall outside these rules and are tax-free regardless of how much is gifted.

As a general rule, if you gift assets subject to a liability, there could be a taxable gain to the donor. If the basis in the assets gifted is less than the liability transferred, it is a deemed sale. The tax treatment depends on the type of assets gifted. Be cautious when gifting when there is a liability attached to the asset.

Cash gifts are the simplest to understand. If you give money to someone, as long as you gift $16,000 or under, you do not have to file a gift tax return. If you gift more than $16,000, you will need to file a gift tax return. There are not tax consequences to either party unless you exceed the $12.06 million gift/estate exemption.

Gifting land requires some thought. Many times, farmland has little basis. Although gifting might be an option, holding the land until death for the stepped-up basis might be advisable. This is especially true if one of the individuals you gift land to may want to sell (think sibling selling their share of farmland to the farming sibling).

Farm partnerships can be very complex and cause serious issues for gifting. If the fair market value (FMV) of the donor's interest in the partnership is less than his/her share of the liabilities, there is no gift tax consequences (outside the exemption and exclusion amounts). If the liabilities are in excess of basis, the gift would be deemed a part sale. This is related to the negative capital account issue I've written about before. Negative capital accounts mean you have debt in excess of basis, typically due to accelerated depreciation and/or excess distributions. When gifting a partnership interest with negative capital account, the donor can realize a substantial gain because of "hot assets." In some cases, the taxable gain can exceed the FMV of the partnership interest gifted. And, the real scary thing is the IRS can now identify these types of gifts because of the recent K-1 reporting requirements.

Gifting stock in closely held corporations is fairly straightforward. A valuation is needed if you gift in excess of $16,000 in FMV. One tricky part of gifting stock, especially for S corps, is the basis. In a C corp, the basis is contributed capital, which is typically nominal. In an S corp, the basis can vary based on several factors. Making sure the correct basis is transferred is key.

As you can see, gifting can be very complex. Talk to your tax professional before gifting assets.

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-- DTN Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota.

-- Read Rod's "Ask the Taxman" column at https://www.dtnpf.com/…

-- You may email Rod at taxman@dtn.com

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