By: Scott Lawrence | 04/30/20
For 2020, the lifetime gift and estate tax exemption has reached a whopping $11.58 million ($23.16 million for married couples). As a result, 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.
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. Nontaxable transfers that need not be reported on Form 709 include:
If all your gifts for the year fall into these categories, no gift tax return is required. But gifts that don’t meet these requirements are generally considered taxable – and must be reported on Form 709 – even if they’re shielded from tax by the lifetime exemption.
If you make gifts during the year, consider whether you’re required to file Form 709. And watch out for these common traps:
It may be a good idea to file a gift tax return even if it’s not required. For example, if you make annual exclusion gifts of difficult-to-value assets, such as interests in a closely held business, a gift tax return that meets “adequate disclosure” requirements will trigger the three-year limitations period for audits.
Suppose you transfer business interests valued at $10 million over a period of years, through a combination of tax-free gifts to your spouse and annual exclusion gifts to your children. If the IRS finds that the interests were worth $15 million, which exceeds the lifetime exemption amount, it can assess gift taxes plus penalties and interest. If you don’t file regular gift tax returns, the IRS has unlimited time to challenge the values of your gifts.
A smart gifting strategy continues to offer significant benefits for you and your loved ones. However, 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.
Paying tuition or unreimbursed medical expenses on behalf of a child or other loved one is a great strategy for making unlimited tax-free gifts without using up any of your $15,000 annual exclusion or $11.58 million lifetime exemption. But it works only if you make the payments directly to a qualifying educational institution or medical provider.
A common mistake is for a parent or grandparent to advance the child the funds he or she needs to pay the expenses or to reimburse him or her for expenses that have already been paid. These payments are treated as gifts to the child, which must be reported on Form 709 if they exceed the annual exclusion amount.
If you are looking for a solution to manage your individual tax planning and compliance needs, contact Michael Thrasher or call 770.396.2200.
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