The advice of someone with an enrolled agent certificate therefore provides significant value when parents present gifts to their children. The knowledge an EA has about such situations is important to promote during holidays and graduation times each year. Some tax practitioners waive their enrolled agent fees for simple advice on gift-giving matters in order to attract opportunities for m!
eeting potential clients. The general tax rule is that the basis of the gift giver is carried over to the recipient. Only testamentary gifts ??? that is, those given upon someone’s death ??? have a basis that is the value when the property is given. Suppose that a father gives stock worth $10,000 to a son that just graduated from law school and passed the bar exam. There is some additional information needed here to answer the basis issue for the enrolled agent test. The figure to determine is the father’s cost. Taking matters a step further, if the father received the stock as a gift from his father, then the law school graduate needs to know his grandfather’s cost. Where matters get tricky is when the new lawyer sells the stock. If grandfather’s cost was $1,000 and the stock is sold for $10,000 by the grandson, there is a $9,000 taxable gain. But, suppose the grandson holds the stock for several years. If the stock continues to appreciate in value, the gain simply increases. However, in today’s volatile stock market, the opposite can occur. That is, the stock can decline in value from the time of the gift. When that happens, the expertise of a professional with enrolled agent training is needed again. Selling gifted property for less than its value when received may still require the reporting of a gain. For example, selling the above-described stock for $8,000 presents a gain of $7,000 because of the $1,000 basis. Suppose the father purchased some stock for $15,000 that he gives to his son when it’s worth $10,000. If the son sells the stock for $16,000 then the carryover basis results in a gain of $1,000. But, there’s a wrinkle in the calculation if the stock is sold for a loss. If the stock is sold for $8,000 by the son, the loss is not $7,000. Instead, the carryover basis of $15,000 is ignored. The loss calculation is limited to the $2,000 decline in value from the time of the gift. Selling the stock for an amount between the value at the time of the gift ($10,000) and the giver’s basis ($15,000) results in neither a gain nor loss. This is why gifts valued for less than the donor’s basis attract the gift recipients as future tax clients. Conditions upon the eventual sale of gifted properties affect the tax liability. Enrolled agents prepare for addressing these situations on the enrolled agent test and in their tax practices. IRS Circular 230 Disclosure Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
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