Understanding the Gift Tax and Form 709

Understanding the gift tax is important for people who plan on giving away large amounts of money. In certain situations, people will need to file Form 709, but may not actually owe any gift tax when they make a gift to someone. To properly understand the gift tax, it is essential to understand the gift tax exemption. A gift is any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.

 

The Gift Tax Exemption Amount

Too many people get hung up on the $14k a year limit. There is a lifetime exemption of approximately $5.3M that can also be used. So unless someone plans on giving away more than 5.3M over their lifetime, no taxes will be due. The donor would just have to file Form 709 to report the gift to the IRS but no taxes would be due.

$5.00 million was set by Congress and the President under ATRA in January 2013. The amount has changed historically over time, but Congress and President were setting it as time went by. Under ATRA, the exemption is now indexed for inflation. The IRS itself announces the adjustment for inflation towards the end of each year.

Say you give two favored relatives $20,000 each in 2014 and give another relative $10,000. The $20,000 gifts are called taxable gifts because they exceed the $14,000 annual exclusion. But you won’t actually owe any gift tax unless you’ve exhausted your lifetime exemption amount.

 

Gifting Between Spouses

Spouses can each give up to $14,000 to the same recipient and still stay within the annual exclusion threshold. Together, a married couple can give $28,000 to each donee without incurring the gift tax. Most Americans don’t have to worry about federal estate or gift taxes. For this year, the lifetime exclusion from federal estate tax and gift tax is $5,340,000. (Also, transfers between spouses typically aren’t subject to tax.) But even if your estate is much smaller than that, you might find the annual gift-tax exclusion helpful to know about because of state estate-tax considerations.

 

Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return

If you make a taxable gift, one in excess of the annual exclusion mentioned above, you must file Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return. The return is required even if you don’t actually owe any gift tax because of the $5.34 million lifetime exemption but is is due by April 15 of the year after you make the gift.

 

Use this Form 709 to report:

  • Transfers subject to the federal gift and certain generation-skipping transfer (GST) taxes, and
  • Allocation of the lifetime GST exemption to property transferred during the transferor’s lifetime.

 

Married Filing Gift Tax Return

If you’re married, you can’t file a joint gift tax return. Each spouse must file a separate return if he or she makes any taxable gifts. You can, however, choose to “split” gifts with your spouse. Making a split gift allows you to take advantage of your annual gift tax exclusion plus your spouse’s exclusion for a gift that is made entirely by you.

Refer to Form 709 (PDF), 709 Instructions and Publication 559. Among other items listed you might need include:

  1. Copies of appraisals.
  2. Copies of relevant documents regarding the transfer.
  3. Documentation of any unusual items shown on the return (partially-gifted assets, other items relevant to the transfer(s)).

 

Educational and Medical Exclusions for Gift Tax

There is an important exclusion to the gift tax rules. Payments that you make on someone’s behalf for qualified tuition or medical expenses do not count towards the annual limit for gift tax purposes. Thus, parents could directly pay for a child’s education and not need to file a gift tax return. However, payment(s) must be made directly to a qualifying educational organization or medical care provider in order to qualify for the exclusion. If the child receives the funds directly and then pays the educational institution, there will be no exemption. You can also place funds directly into a 529 education savings plan to avoid the gift tax — but note that certain rules apply.