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When Should Gift Tax Return Be Filed?

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June 3, 2024 •  NW Estate Law, LLC
There are many people who know estate planning quite well but draw blanks when issues about gift tax returns are raised.

Gift Tax Limits for 2024: Annual and Lifetime - MagnifyMoney

Did you know that some gifts are taxable?  This is called a gift tax return or IRS Form 709. Any gift that is a transfer of property, including money, without expecting something of equal or greater value in return, is taxable. However, there are some exceptions or special situations that’re, generally, not taxable gifts. That said, even tax-free gifts can be taxable.

These can be confusing but I recommend referring to the FAQ section of the IRS’ article on Gift Taxes. If you require more assistance, do not hesitate to contact your estate attorney. According to Forbes, it is the “Most Understood Part Of Estate Plans”.

Gifts that can be Excluded:

  • Tuition or medical expenses you help pay for someone else
  • Gifts to a political organization
  • Gifts that are less than the annual exclusion for the calendar year
    • $18,000 in 2024 for single people
    • $36,000 in 2024 for couples
  • Gifts to your spouse

It is a good idea to file the free IRS Form 709 whether or not the gift seems significant, as the IRS has no limitations if you fail to file a gift tax form. The IRS can ask about the gift transaction at any time. They could come after your heirs or your estate after you’ve passed. At that time, if that happened, friends or family may not have evidence to prove that you complied with tax law. The IRS also has the right to assess other penalties or interest for all of the years from the date of the gift tax filing to the current date, if the IRS Form 709 was not filed.

For this reason, Form 709 has a section to report “non-gift transactions”. This is a good way to to be proactive and start the statue of limitations clock ticking and prevent the IRS from recharacterizing your gift years later. The IRS has three years to to take action from once the gift tax was originally filed, incorrect or not. Execptions are made, however, for fraudulent returns or if the return has substantial mistakes or missing information.

For example, let’s say you sell an asset to your children at less than market value. The difference between the selling price and the market value is a gift. So is forgiving or making a loan at a below-market interest rate.

If parents pay bills for adult children, this might be considered a gift if the gifts are valuable or if you also make significant gifts of money or property to the same person in the same year.

A gift tax issue the IRS pays close attention to is valuation. There’s not much question about the value of a publicly traded security, but for many other assets, there’s a lot of room to question the correct value, and the gift tax is based on the asset value at the time the gift is made.

While spouses may make unlimited gifts to each other tax-free, there are times when gifts between spouses must be reported. One time is when the gift is defined in the tax code as a “terminable interest.” Another time is if one spouse is not a U.S. citizen. Gifts to that spouse from the other spouse exceeding a certain amount during the year must be reported on IRS Form 709.

It’s always a good idea to check with your estate planning attorney about when a gift tax return should be filed to protect yourself and your heirs.

Reference: Forbes (Feb. 16, 2024) “Know The Most Misunderstood Part Of Estate Plans: Gift Tax Returns”

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