04/07/2024
Gift Tax Return (Form 709)
Who may potentially subject to Gift tax? In general, itβs the donor (giver), not the recipient (receiver). While recipients do not encounter any immediate tax consequences, they may be subject to capital gains tax if they sell the gifted property in the future. However, the recipient can choose to pay the tax, particularly if the amount would exceed the donor's lifetime gift tax exclusion.
Only individuals are required to file gift tax returns. If a gift is made by a trust, estate, partnership, or corporation, the individual beneficiaries, partners, or stockholders are considered the donors and may be responsible for the gift and GST taxes.
The gift tax applies if the giver, after transferring asset(s) or properties (including money), directly or indirectly, to another do not receive anything or an equivalent value in return. This is true regardless of whether the giver intended the property to be a gift or not. Although it may seem burdensome, but most Americans will never pay a cent in gift taxes to the IRS because of several key rules, discussed below. Another important note to remember, although the individuals are married, there is no such a joint Gift tax return. Each spouse must file a separate return if they make any taxable gifts (taxable if itβs beyond the annual gift limit).
The annual gift limit for 2023 and 2024 are $17,000/recipient and $18,000/recipient respectively. If the gifts made in excess of the annual limit (called taxable gifts), stated earlier, then the giver is required to report it as taxable gift on Form 709, but this does not automatically trigger the gift tax. Any amount above these limits will reduce your lifetime gift allowance ($12.92 million in 2023 and $13.61 million as of 2024), which, if exhausted, will result in the gift tax. If the individuals are married, each spouse is entitled to a separate lifetime limit. In other words, if a gift exceeds the annual exclusion limit, the excess amount is simply deducted from the personβs lifetime exemption limit, and no taxes are owed (unless it is beyond the lifetime limit). These amounts are adjusted for inflation by the IRS annually. There is no limit on the number of individuals you can gift in this way.
Items that are considered gifts are cash, securities or stocks, real properties, vehicles, art pieces, interest-free loans etc. This list is not exhaustive. Certain gifts such as future interests are not subject to the annual exclusion amount and thus the giver must file Gift tax return regardless of the gift amount (even below $17,000 for 2023).
Certain gifts are entirely free of tax (exempt from the annual limit), including tuition and fees (room and board, books & supplies are not part of this exception), medical expenses (directly paid to the medical service provider), charitable donation to IRS approved organisations, political contributions and most importantly gifts to US citizen spouse (regardless of the amounts). If gifts made to a non-US citizen spouse, the annual exclusion amount is $175,000 in 2023 ($185,000 in 2024).
The IRS gift tax rate is a marginal rate, meaning it rises as the total amount you have gifted for the year increases and you can find it here (https://www.irs.gov/forms-pubs/about-form-709). This is similar to how income tax rates work. As it was mentioned before, the gift tax only kicks in after the lifetime gifts limit of $12.92 million in 2023 has been exhausted.
Special rule applies if one made contributions to a 529 college savings plan. This special rule permits you to make a lump sum contribution in one given year and spread it out over five years for gift tax purposes. One can contribute up to $85,000 (2023: $17,000 X 5 years) to commence a 529 college savings account for a child without reducing the giverβs lifetime gift allowance. If the individuals (giver) are married, each spouse will be entitled to do the same.
As mentioned earlier, there is no such a joint Gift tax return. Each spouse must file a separate return if they make any taxable gifts. However, you can choose to "split" gifts with your spouse. This allows you to use both your annual gift tax exclusion and your spouse's exclusion for a gift made solely by you. A good example letβs assume one of the spouses made gift of $34,000 in 2023. By considering it as a split gift, you can fully shelter the gift using both your and your spouseβs annual exclusion of $17,000/person. This way, there will be no gift tax and the gift does not affect, in 2023, the lifetime gift allowance for both spouses. If this method is chosen, you are then required to file Form 709 and your spouse must consent to the arrangement.
So, if one makes a taxable gift (beyond the annual limit of $17,000/recipient in 2023), then the giver is required to file Form 709. This return is required even when the giver does not actually owe any gift tax due to the lifetime gift allowance. The gift return due date is typically Apr 15, the same deadline as the giverβs individual tax return. If an extension is filed on-time, then the extended due date also applies to the giverβs gift tax return.
SOME EXAMPLES:
Letβs take a look at some examples to better understanding the gifting concept.
Example #1 - Letβs assume individual A gave three of his/her relatives $23,000 each in 2023 and gave 4th relative $14,000. The first 3 gifts are considered as taxable gifts since the amounts for relative 1-3 exceed the annual limit of $17,000 (for 2023). Assuming the individual A has yet to use any of his/her lifetime limit, the person has met a Gift tax return filing requirement although he/she does not owe any gift tax. But nonetheless, the 3 taxable gifts will reduce his/her lifetime limit by $6,000 ($23,000 β 17,000 = $6,000/relative) for each gift or $18,000 ($6,000/relative X 3 relatives) total for the 3 gifts. The fourth gift falls below the annual limit and thus itβs to be ignored. If all the four gifts are made exactly $17,000 (2023 tax year) for the 4 relatives, then these 4 gifts are ignored since no single gift exceeds the annual limit amount. The 3 taxable gifts made in 2023 would reduce the individualβs lifetime gift allowance by $18,000 to $12,902,000 ($12.92 million - $18,000). The 4th gift of $14,000 made in 2023 would not reduce the individual Aβs lifetime gift allowance.
Example #2 - A grandfather paid $30,000, in 2023, for his granddaughter's tuition and also gave her $17,000 for books, supplies, and equipment. Neither payment needs to be reported for gift tax purposes β the tuition payment is fully excluded, and the $17,000 falls within the annual exclusion limit. If the granddaughter had already paid the school before the grandfather sent her the $30,000 then the grandfather would have made a reportable gift of $13,000 ($30,000 - $17,000), but not taxable. The gift would affect his $12.92 million lifetime gift allowance in 2023 by $13,000.
Example #3 - In 2023, a giver gave 5 people with a total $100,000 worth of gifts or $20,000 to each recipient. Bearing in mind that the annual gift limit is $17,000/recipient, $3,000 of each personβs gift, or $15,000 ($20,000 - $17,000 X 5 people) of the total amount given, is not excluded and affect the lifetime gift allowance by $15,000 ($12.92 million - $15,000).
Hope this helps others to have a better understanding about US gift tax.
