By Jackie Phan, CPA, Tax Manager
ASL Family Wealth & Individual Tax Group
The season of giving is almost upon us, but will generosity to friends and family trigger a gift tax return filing requirement? The main tax advantage of gifting during your lifetime is the removal of assets that would otherwise be included in your gross estate and be subject to federal estate tax upon your passing. But even if your estate is under the current estate tax filing threshold of $5.49 million per taxpayer for 2017 (or $5.6 million in 2018), you may still be required to report gifts you made during the tax year. The annual gift tax return, IRS Form 709, is due April 15th following the calendar year the reportable gifts were made.
Some gifts require reporting on a gift tax return, and some do not. Here is a rundown of some common gifts and potential filing requirements:
No gift tax return required:
- Amounts qualifying for the gift tax annual exclusion: For 2017, the annual exclusion amount is $14,000 per donee; this amount is increasing to $15,000 in 2018.
- Double the annual exclusion benefit by having a spouse match these gifts, because the spouse can also make gifts eligible for the annual donee exclusion.
- Paying tuition bills directly to a school for the benefit of children and grandchildren.
- Payments made directly to an institution that provides medical care or medical insurance to an individual.
- Contributions to an IRC Section 529 college savings plan up to the annual exclusion amount, which is currently $14,000.
- Gifts of highly appreciated capital gain property valued at no more than the annual exclusion amount, which avoid triggering capital gains tax. The tax basis of the gifted property will transfer to the donee.
Gift tax return required:
- Making larger gifts that will be tax-protected through the estate and gift lifetime exemption. For 2017, the exemption is $5.49 million per taxpayer, increasing to $5.6 million in 2018.
Consider transferring those assets that might have the most significant opportunities for appreciation, so that future appreciation would accrue outside the donor’s estate for federal estate tax purposes.
- Examine whether certain gifts can be valued with a discount (e.g. because of a minority interest), thereby permitting a larger gift that still fits within the annual exclusion and/or lifetime exemption amount.
If gifts are made of property that is difficult to value, but falls within the annual exclusion amounts, you should still consider filing gift tax returns to report these gifts so that the statute of limitations can begin to run. This tactic limits the risk of an IRS challenge of these transfers in the future.
These are some of the basic ideas relevant when considering a gifting strategy that can:
- enable the transfer of assets out of the potentially taxable estate of the donor,
- be without any gift tax cost to the donor,
- enable significant accumulation in the hands of the donees (or intermediaries, such as trusts), and
- potentially avoid filing a gift tax return.
Remember, you will need to make 2017 gifts before December 31st to take advantage of this year’s annual gift tax exclusion. Our Family Wealth & Individual Tax Planning Group would be happy to discuss these matters further should you have any questions.
For a more in depth discussion listen to our latest podcast as Jackie Phan and Julie Malekhedayat from our Family Wealth and Individual Tax Planning Group go into further detail and conversation regarding gift tax returns.