Carryover Basis

Carryover basis is a method for determining the tax basis of an asset when it is transferred from one individual to another. Carryover basis is often used when one party gifts property to another. In these cases, the basis remains the same as when the giver held the asset, adjusted for any gift tax that was paid.

Estate planning commonly uses the carryover basis when transferring property to future heirs. It determines the value of the property at the beginning of the period and helps determine the tax rate that estate owners or heirs must pay on capital gains when they sell the asset. Carryover basis differs from step-up basis in that a carryover basis is used during the lifetime of the giver, while a step-up basis is used in inheritance after the giver passes away. In a step-up basis scenario, the value of the assets being transferred is adjusted to the current market value.

Gift taxes are a critical component of the carryover basis. This is a federal tax that applies to scenarios in which the receiving party does not pay the giver full value for the gift (although they might pay a lesser amount). The gift giver is the one that bears the brunt of the gift tax. In general, gifts to one's spouse or to a political organization, or gifts valued at less than the annual gift tax exclusion, along with medical and educational expenses, are excluded from the gift tax. (For example, grandparents can pay for their grandchildren’s tuition without being penalized by the gift tax.)

In 2017, the gift tax maximum remained at $14,000. In 2018, that number rose to $15,000. This means that an individual may give another individual $15,000 or less per year, without incurring a gift tax.

A gift tax differs from an estate tax, which is levied on an heir's inherited portion of an estate. In 2018, the exclusion limit for the estate value was combined gross assets and prior taxable gifts exceeding $11.18 million. Broken down, this means that an estate of $11 million would not be required to file a tax return, and would be exempt from paying an estate tax. While the estate tax is mostly imposed on assets left to heirs, it does not apply to the transfer of assets to a surviving spouse. The right of spouses to leave any amount to one another is known as the unlimited marital deduction.