In December, many of our clients are thinking about year-end gifts to family and others. However, not everyone is aware that such gifts may need to be reported on a federal gift tax return (IRS Form 709), and many gift tax returns that should be filed are missed. These mistakes can result in unpaid gift taxes, interest and even penalties. With that in mind, this article will provide a brief overview of the federal gift tax and also review some of the basic requirements for filing gift tax returns.
What gifts are subject to federal gift tax?
Broadly speaking, the federal gift tax applies to property transferred, during lifetime, without receiving full and adequate consideration in return. For example, a cash gift of $50,000 to an adult child is considered a taxable gift for federal gift tax purposes, but a sale of property for $50,000 (the full fair market value) is not. It makes no difference whether such transfer is in trust or outright; whether the gift is direct or indirect; or whether the property is real estate or personal property.
Taxable gifts that collectively exceed the transferor’s federal gift tax exemption (discussed below) are subject to gift tax at a flat 40% rate under current law. If gift tax is due, the person giving the gift (the donor) is primarily responsible for paying the tax. However, if the donor does not pay the tax, the person receiving the gift (the donee) may have to pay the tax.
The federal gift tax exemption is the maximum amount that a person can give away during lifetime without incurring federal gift tax. As a result of the recent Tax Cuts and Jobs Act, in 2018, the statutory federal gift tax exemption amount is $11,180,000 per individual. This exemption amount is adjusted annually for inflation. Under current law, the gift tax exemption is scheduled to revert back to the exemption amount that existed before 2018 (about $5.5 million per individual) beginning on January 1, 2026, absent future legislation by Congress. This temporary increase in the gift tax exemption represents a historic and limited opportunity to engage in significant lifetime transfers until 2026.
Under what circumstances must a federal gift tax return be filed? In 2018, you can give up to $15,000 each year to as many people as you like, without paying any federal gift tax and without reducing your remaining “unified” gift and estate tax exemption for transfers during lifetime or at death. This $15,000 exclusion amount (indexed for inflation) is commonly referred to as the “gift tax annual exclusion.” However, with certain exceptions, if you make gifts to anyone during a calendar year that collectively exceed the gift tax annual exclusion amount, then you must file a federal gift tax return and pay any gift tax that is due. A gift tax return also must be filed in order to report any gift of a future interest, regardless of value. A gift is a “future interest” if the donee’s rights to the use, possession and enjoyment of the property will not begin until some future date. Likewise, a donor must file a gift tax return in order to “split gifts” with the donor’s spouse, as discussed below.
What is the due date for filing a federal gift tax return?
You must normally file Form 709 no earlier than January 1, but not later than April 15, of the year after the gift was made. For example, all taxable gifts made during 2018 must be reported on a federal gift tax return filed no later than April 15, 2019 (unless a valid extension is granted). However, in instances when April 15 falls on a Saturday, Sunday or legal holiday, the Form 709 will be due on the next business day.
You can request an automatic six-month extension if you need more time to file your federal gift tax return. In addition, any extension of time granted for filing your federal individual income tax return will automatically extend the time to file your federal gift tax return. In any event, however, if you owe federal gift tax, you must pay it by April 15 in order to avoid interest and penalties for late payment.
Are there special rules for married couples?
If your spouse is a U.S. citizen, you can gift an unlimited amount to your spouse without paying any federal gift tax and typically without having to file a federal gift tax return.
Another special rule is that married taxpayers who are U.S. citizens or residents can make an election to “split gifts.” This allows one spouse to make a gift to a third party, but have the gift treated as made one-half by each spouse. The election to split gifts for a year applies to all gifts during that calendar year by the married couple, except for gifts to each other.
Are payments for education and medical expenses subject to federal gift tax?
Certain qualified transfers are excluded from federal gift tax. A “qualified transfer” generally means a transfer made directly to an educational institution for tuition of another or to a medical care provider for medical expenses for another. Qualified transfers won’t reduce your remaining gift or estate tax exemptions, and you won’t have to file a gift tax return, but only if the payments are made directly to the service provider, such as the school or doctor.
What is the statute of limitations for challenging a federal gift tax return?
If a gift is “adequately disclosed” (as defined by complex IRS regulations) on a federal gift tax return, the IRS usually has three years to audit the gift tax return. However, if a gift is not adequately disclosed, or if a gift tax return is not filed at all, the statute of limitations never begins to run. Similarly, a taxpayer may want to disclose certain sales or other transactions (e.g., a sale of property to a grantor trust), even if a gift tax return is not technically required, in order to start the three-year statute of limitations for the IRS to examine the transaction. Starting the statute of limitations and having finality for the reported value of the transfer are strong reasons to satisfy the adequate disclosure rules.
Do gift tax returns get audited?
Gift tax returns are subject to IRS audit, the same as federal income tax returns. There are many potential pitfalls for those who are unfamiliar with all of the detailed IRS requirements for properly reporting and substantiating gifts made. Mistakes can be costly to fix and lead to a subsequent audit during lifetime or at death. This is why you should strongly consider having your gift tax returns prepared only by a qualified tax professional, such as an attorney or CPA, who has proven experience navigating this complicated area of the law.