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A Gift for Tax Season: What You Need to Know About Gift Tax Returns

June 6, 2024

Gift tax returns are filed with the IRS to report gifts that exceed the annual exemption amount. This amount changes every year. For 2023, the amount was $17,000 and it has increased to $18,000 for 2024. As with any tax return, it is important to understand your filing obligations to avoid any possible penalties for noncompliance. 

What Triggers the Requirement to File a Gift Tax Return?

An individual is allowed to make gifts up to a certain amount every year without the need to file a gift tax return. The annual exemption amount applies per recipient. Accordingly, a grandparent with five grandchildren could gift each grandchild $18,000 in 2024 and not have to file a gift tax return. 

Importantly, gifts are not necessarily just cash transfers. For example, if a parent retitles their house to be jointly owned with their adult child, this is a gift of half of the interest in the house, and the value of that interest must be determined and reported on a gift tax return.

The annual exclusion only applies to gifts of a “present interest.” A gift with restrictions might have to be reported on a gift tax return even if it is valued below the annual exclusion amount since it may not be considered a gift of a present interest. This is true whether the gift is given to a trust or directly to an individual.

When Do You Need to Pay Gift Tax?

Just because you are required to file a gift tax return doesn’t necessarily mean you have to pay gift tax because you also have a lifetime gift exemption, which is “unified” with the estate tax exemption. Presently, this exemption is $13.61 million per person, and $27.22 million for married couples, but is set to decrease greatly in 2026.

This means that during your lifetime, any gifts you give that exceed the annual exclusion will be aggregated and deducted from your estate tax exemption at death. 

Because of the lifetime exemption, most gifts made during a person’s life will not incur gift tax, though some people might choose to pay a gift tax and preserve their exemption.

What Is the Filing Deadline for a Gift Tax Return?

A gift tax return (Form 709) is due at the same time as your personal tax return. If you get an extension of time to file your individual tax return, you automatically have the same extension for Form 709. However, you may also separately request an extension of time to file Form 709. Note that if you expect to pay gift tax, you should file the return even if you cannot pay the tax as the failure to file penalty is much more substantial than the failure to pay penalty. 

Why Should You File a Gift Tax Return?

You should comply with gift tax rules because there are penalties for failure to file and late filing of a gift tax return. Penalties are calculated as a percentage of the amount of tax owed. Even if you file your taxes jointly, gift tax returns are individually filed. Spouses can elect to “split” gifts, meaning one spouse can report a gift and split the amount equally with their spouse to use the spouse’s exclusion amount, but the spouse must consent. 

In addition, even if a gift is not taxable, filing a timely gift tax return can provide other benefits. For example,  a timely filed Form 709 will trigger the automatic allocation of the Generation Skipping Transfer Tax (GST) exemption which is desirable if you are creating a trust that will last for several generations. Alternatively, it might make sense to elect not to automatically allocate GST. In that case, you want to opt out of the automatic allocation on your gift tax return.

Another example of the benefits of filing is if you make a gift where the value is not clear (i.e., gifts that are not cash or marketable securities). The filing of the gift tax return starts the 3-year time period in which the IRS can challenge the gift value. Once that period closes, the IRS cannot contest your valuation.

How Can You Ensure Proper Tax Planning and Compliance?

It is best to be proactive and discuss your gifting and tax planning with a tax professional who can advise you regarding strategies for minimizing your taxes. A tax professional can also guide you in complying with tax laws. Once you make a gift, it is critical to keep accurate records of the gift and file timely returns. 

If you have questions about your gifting or need assistance with your tax planning, contact us for a consultation.

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