For 2020, the lifetime combined gift and estate tax exemption has reached a whopping $11.58 million ($23.16 million for married couples). As a result, under current law, few people will be subject to federal gift taxes.
If your wealth is well within the exemption amount, does that mean there’s no need to file gift tax returns? Not necessarily. There are many situations in which it’s necessary (or desirable) to file Form 709 — “United States Gift (and Generation-Skipping Transfer) Tax Return” — even if you’re not liable for any gift taxes.
If you’re required to file, keep in mind that the deadline for Form 709 is April 15 of the year after you make a gift; that deadline can be extended to October 15.
All gifts are taxable, except . . .
The federal gift tax regime begins with the assumption that all transfers of property by gift (including below-market sales or loans) are taxable, and then sets forth several exceptions. Some of the nontaxable transfers that need not be reported on Form 709 include:
- Gifts of present interests (see below) within the annual exclusion amount (currently, $15,000 per done – i.e., the gift recipient),
- Deductible charitable gifts, and
- Gifts to one’s U.S.-citizen spouse, either outright or to a trust that meets certain requirements.
If all your gifts for the year fall into these categories, no gift tax return is required. But other types of gifts may be taxable — and must be reported on Form 709 — even if they’re shielded from tax by the lifetime exemption.
Traps to avoid
If you make gifts during the year, consider whether you’re required to file Form 709. And watch out for these common traps:
The $15,000 annual exclusion applies only to present interests, such as outright gifts to which the donee has immediate access. Gifts of future interests, such as transfers to a trust for a donee’s benefit (wherein the donee cannot withdraw, or demand payment of, the transferred property) aren’t covered, so you’re required to report them on Form 709 even if they’re less than $15,000.
As previously noted, gifts to a U.S.-citizen spouse need not be reported on Form 709; this is due to the unlimited gift tax marital deduction that is available to married U.S. citizens. However, a gift from U.S. citizens to a non-U.S. citizen spouse is subject to special rules. Notably, the unlimited gift tax marital deduction is only available for transfers from the U.S. citizen spouse to a special type of trust known as a Qualified Domestic Trust, or DQOT.
Spouses may elect to split a gift to any donee, so that each spouse is deemed to have made one-half of the gift, even if one spouse owned the gifted property. This allows married couples to combine their annual exclusions and give up to $30,000 to each donee. To make the election, the donor spouse must file Form 709, and the other spouse must sign a consent or, in some cases, file a separate gift tax return.
To file or not to file
To keep from running afoul of the IRS, it’s critical to know when you need to file a gift tax return. We can help you in that determination.