• Taxes & Insurance

Do I Need to File a Gift Tax Return?

April 5, 2018 | Brian Wainscoat, CPA

Don’t look now but the deadline for filing your 2017 federal income tax return is right around the corner. Unless you receive an extension, you must file your return by April 17, 2018 — which is less than two weeks away.

If you’re like many people, you are probably focused on completing IRS Form 1040. This is the individual income tax return used by many taxpayers to report their total and adjusted gross income, deductions, exemptions, tax credits, associated taxes and amount of income tax that has been withheld by their employer- as well as any estimated tax payments made during the year

However, if you made any gifts to your children or other family members last year, there’s an additional tax form you may have to file along with your 1040. IRS Form 709 – also known as the United States Gift (and Generation-Skipping Transfer) Tax Return – which is used to report any transfers subject to federal gift and certain generation-skipping transfer (GST) taxes.

Do You Need to File a Gift Tax Return?

The IRS provides detailed guidance with regard to the circumstances under which taxpayers must file a gift tax return. Generally, the rules are: if you gave gifts totaling more than last year’s $14,000 annual gift tax exclusion to one person (not counting your spouse) in 2017, you will probably have to file the form. On the other hand, if you didn’t give more than this amount to a single person last year, you probably won’t have to file a gift tax return.

There are some details and nuances that apply to the filing of gift tax returns, though. For example, you will generally be required to file a gift tax return if:

  • You gave gifts in any amount of future interests (such as remainder interests in a trust) last year.
  • You gave gifts of community or jointly held property last year.
  • You gave gifts to a non-citizen spouse that exceed the annual gift tax exclusion amount of $149,000.
  • You want to split gifts with your spouse in order to take advantage of a combined annual gift tax exclusion of $28,000.

Filing Gift Tax Returns

There are important things to note about the filing of gift tax returns. Some of them include:

  • Spouses are not allowed to file a joint gift tax return. Each spouse must file his or her own Form 709 if filing is required — including if a gift of property they held together as joint tenants or tenants by the entirety was made.
  • Only individuals are required to file Form 709 — not trusts, estates, partnerships or corporations.
  • You typically must file a gift tax return even if you ultimately don’t owe any tax.
  • You are not required to file a gift tax return for tax-deductible gifts you made last year to qualified 501(c)(3) charities. This assumes that you transferred your entire interest in the property to the qualifying charity.
  • You are not required to file a gift tax return to report gifts made for educational and medical expenses if they are made directly to a school or healthcare provider.

Sometimes, individuals give away assets that are hard to value, such as ownership shares in a closely held business, fine art or other collectibles. Some tax experts recommend that in this scenario, it may be smart to file a gift tax return even if it isn’t technically required. Additionally, for those hard to value assets its recommended to hire a “qualified appraiser” (as defined by the IRS) to value the assets. Doing so could protect you later if the IRS ever challenges the value of the gift. Under the tax law and IRS regulations, you must include “adequate disclosure” of the gift on the gift tax return to start the statute of limitations running on the gift. The only way to start the statute of limitations is to file a gift tax return.

How Long Should You Keep Gift Tax Returns?

Do everyone a favor, keep them indefinitely! Your heirs will need them to calculate the tax, if any, on your estate. And remember to keep them in a safe place and let those close to you know where the copies are stored. A Safe Deposit box is a great place to store them, just be sure someone knows that you have one and give a trusted relative, friend, or even trusted advisor access just in case.

Annual Exclusion Rising This Year

Starting this year, the annual gift tax exclusion is rising from $14,000 to $15,000 due to inflation. So, you should use this figure when determining your Form 709 filing obligations this time next year for tax year 2018.

The details surrounding Form 709 and the filing of a gift tax return can get a little complicated, so you should consult with a tax professional about your specific situation.

To learn more about taxes and how they fit into your overall financial strategy, download our free Personal Capital Tax Guide for Holistic Planning.

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This blog is for informational purposes only and is intended to offer guidance; not specific legal or tax advice. Clients are advised to consult their CPA before taking action based on this advice.

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