For tax purposes, gift givers, rather than gift recipients, have to account for and potentially pay the gift tax. But you won’t owe the gift tax until you have given away millions in cash or other assets during your lifetime. It sounds simple enough, but you still may have to file gift tax returns even though you don’t owe any tax.
The annual federal gift tax exclusion changes almost every year to adjust for inflation. It allows you to give a certain amount to as many people as you wish without those gifts counting against your substantial lifetime exemption. Gifts made during your lifetime will reduce your taxable estate. So, making annual gifts up to the annual exclusion is a smart way to reduce your taxable estate without any negative side effects.
Sounds good so far, right? Well, it may not be so clear. Some gifts, for example, are exempt from federal tax, including the following:
- Gifts to IRS-approved charities
- Gifts to your spouse, with certain exceptions
- Gifts covering another person’s medical expenses made directly to the service providers
- Gifts covering another person’s tuition expenses made directly to the institution
So, when exactly do you need to file a gift tax return? Some gifts may require you to file Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return. This is necessary even if you don’t owe taxes on the gifts you’re reporting.
If it sounds a bit confusing, it is. You don’t owe tax, so why do you need to file a gift tax form anyway? The federal gift tax exists for one reason: to prevent citizens from avoiding the federal estate tax by giving away their money before they die.
Some transactions that are not commonly thought of as gifts could be considered gifts for gift and estate tax purposes. For example, adding a joint tenant to real estate, canceling indebtedness, making a payment owed by someone else, making a gift as an individual to a corporation, and giving real or tangible property all qualify as gifts that are subject to the gift tax.
Before you get bogged down in these many details, we suggest you talk to a professional about your gift habits, abilities, and financial picture.
We welcome the opportunity to put our tax expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.