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Lifetime Gifts and Taxes

An individual is allowed to give *$5.49 million without gift taxation while living. Understand this has nothing to do with income tax. Many receive poor advice regarding income tax repercussions – especially when selling an investment(s) to make gifts.

Gift Tax is not Income Tax

I received an email from a very confused niece helping her aunt finalize her tax return. It seems last year, her aunt had decided to gift approximately $1m to her heirs. The aunt had taken the time to review her net worth, income and expenditures to ensure she had enough financial resources available for her future support. But unfortunately, income tax estimates they received regarding the gifts were not even close to the actual tax owed.

Second Opinions Can Save You Money

Her advisory team, which included an unnamed financial advisor and attorney, estimated an approximate $18,000 ordinary income tax liability on the gift. Although a majority of the aunt’s gift came from a heavy cash position and some minimal stocks/equities, which are typically low on taxation, $337,000 came from an annuity. The final tax bill was just over $100,000! So where did the tax discrepancy come from?

Annuities Can Cause a Major Tax Bite

There is nothing wrong with gifting an annuity –  but know how they are taxed. In this case, the aunt had invested $50,000 in an annuity a few decades earlier. After growing to approximately $337,000 it was cashed out for gifting purposes. Annuities are subject to the giver’s ordinary income tax rate – not short or long term capital gains tax.

In this example, the aunt cash surrendered her annuity in full creating a $287,000 taxable 1099. That’s right $287,000 ($337,000 cash value less her initial investment of $50,000) was added to her already taxable income (Pensions & Social Security). This moved her into a $340,000 gross income range.

Ease the Pain of Taxes

In a perfect world, this case should have been in the hands of a competent financial advisor, CPA and an Estate Planning Attorney. A competent team could have substantially reduced an unfavorable tax burden through prudent advice and proper financial planning.

This is another example of someone losing money through poor financial planning advice. Please take your time when making investment changes of any kind. A second opinion may prevent possible loss to your income, savings or estate.

* Source:

This information is not intended to give specific recommendations, investment, legal or tax advice. Advisory Services offered through Nepsis Advisor Services, Inc.; An SEC Registered Investment Advisor.
Related Article “The Real Cost of Poor Financial Planning”


Rick Torrington

Rick Torrington, CFP® has been offering sound comprehensive financial, retirement, asset protection and wealth management advice to his clients in Sarasota and most of Florida for close to 20 years. He is diligent in his efforts to provide clarity and financial knowledge to the public through his articles and ebooks.