The Internal Revenue Code imposes a federal gift tax on any transfer by gift of real or personal property, whether tangible or intangible, on the donor of the property, not the recipient. As a result, the donor may have to file Form 709 - Gift Tax Return to report the value of the gift and pay federal taxes.
A citizen or resident of the United States must file a federal gift tax return if one or more of the following circumstances occur:
- You gave gifts to a particular person (other than your citizen spouse) during the tax year totalling more than the $15,000.00 annual exclusion amount in 2018.
- You gave gifts to a non-citizen spouse during the tax year totaling more than $150,000.00 ($135,000.00 plus the $15,000.00 annual exclusion amount in 2018).
- You gave gifts to any person during the tax year that is considered a future interest. A gift is a present interest if the recipient receives all the rights to use, possess or enjoy the property immediately. A gift is a future interest if the recipient's rights to use, possess or enjoy the property will not begin until some future date (e.g. reversions, remainders and other similar interests or estates).
- You gave gifts of any amount to your U.S. citizen spouse, whether a present or future interest.
- You did not give $15,000.00 or more in gifts to any single person.
- All gifts you made this year were of present interests.
The annual exclusion limit ($15,000.00 in 2018) applies to every recipient of a gift during the tax year. For example, if a donor five adult children and gave each child a $14,999.00 gift in 2018, he would not have to file a gift tax return. Even though the donor gave $74,995.00 in gifts during 2018, he did not exceed the annual exclusion limit to any one recipient, so he is not required to file a return. The fair market value of the gift will determine whether it is covered by the annual exclusion amount.
Additional, spouses can consent to a joint gift and double the annual exclusion amount to a recipient to $30,000.00 (this joint gift is called a "split gift"). However, if the joint gift exceeds the doubled annual exclusion amount, then each spouse will have to file a separate gift tax return and report half of the gift (there is no joint gift tax return available). Only individuals must file gift tax returns, not partnerships or corporations. If a partnership or corporation gives a gift that exceeds the annual exclusion limit, then the individual partners or shareholders will have to file gift tax returns.
There are four types of property transfers that are not subject to the gift tax:
- (1) Transfers of property to political organizations.
- (2) Transfers of property to certain exempt organizations such as civic league, labor or agricultural organizations or tax-exempt 501(a) organizations.
- (3) Payments made to a qualifying educational organization as tuition on behalf of another individual. It must be direct tuition costs, not books, supplies or room and board.
- (4) Payments made to a person or institution that provided medical care for another person. Qualifying medical care excluded from gift tax include expenses incurred for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body, or for necessary transportation primarily for medical care. It does not include any amounts reimbursed by the recipient's medical insurance company.
If you must file Form 709, there are two ways to deal with the payment of tax. The first method is to simply pay the amount due to the IRS with the gift tax return. The second method is to pay the tax by reducing the taxpayer's basic exclusion amount of his or her estate tax exemption. In 2018, a taxpayer's basic exclusion amount is $11.2 million ($22.4 million for a married couple) which means, at the end of life, that is the amount of assets that can be shielded from federal estate tax liability. If the taxpayer has filed Form 709 throughout his or her life and reduced the basic exclusion amount in lieu of paying taxes, then the estate must calculate this reduction on the Form 706 - Estate Tax Return and pay federal estate taxes on the amount of assets over this exclusion. While the gift tax might be avoidable during the taxpayer's life, it can reduce any future inheritances to your heirs due to the basic exclusion amount being eroded away.
The federal gift tax return is due by April 15th in the calendar year after the gift was made. A six-month extension will be granted if the taxpayer has already applied for an extension to file federal income taxes using Form 4868 or Form 2350. If no income tax extension was requested, the taxpayer can file Form 8892 to request an automatic six month extension for filing Form 709 only.
Failing to file Form 709 when required to by law can lead to the Internal Revenue Service imposing interest and penalties. If you have questions regarding whether you need to file a federal gift tax return or you need assistance completing the tax forms, then do not hesitate to consult the experienced tax attorneys at Kershaw, Vititoe & Jedinak PLC.