Gift Tax is one of the most misunderstood taxes for individuals. Most people think since they will never exceed the lifetime gift exemption ($5,490,000 for 2017) that they do not need to file a gift tax return, but there are several circumstances where it might be beneficial.  Here are 5 reasons you may need to file a gift tax return:

1. Gifts exceeding the annual exclusion

You can make a gift up to the annual exclusion of $14,000 to multiple recipients. A gift tax return is not required if your annual gifts are below the annual exclusion or consist of medical expenses and education expenses paid directly to the institution. Gifts to family members and friends valued over $14,000 will require you to file a gift tax return.  For instance, if you gift your son a down payment for a house of $20,000, pay their March credit card bill of $2,500, and give them $500 for their birthday, you would need to file a gift tax return to report $23,000 in gifts.

2. You and your spouse agree to split your gifts

Gift-splitting is an election made on a gift tax return allowing spouses to share their annual exclusions. For instance, if you write a check for $25,000 to your daughter and elect gift splitting, you and your spouse can offset the gift by using each of your annual exclusions ($12,500 each). If you do not split the gift, you would exhaust $11,000 of your lifetime maximum for the gift.  Additionally, if the gift is made from a joint checking account, we recommend that you file a gift tax return to affirmatively elect to gift-split and preserve the annual exclusions.

3. Your spouse is not a U.S. Citizen

The unlimited marital deduction allows you to gift any amount of money or property to your spouse without incurring gift tax; however, if your spouse is not a U.S. Citizen, transfers are limited to $148,000 per year.

4. Future interest gifts

A ‘present interest gift’ is one that the recipient is immediately free to use for their own enjoyment or benefit.  Gifts that delayed use until a future point in time are “future interest gifts.” Future gifts do not qualify for the annual exclusion, but strategies can be implemented to convert a future gift into a present interest gift, to maintain the annual exclusion.  A common example of a future gift is paying the annual premiums on a life insurance policy in an Irrevocable Life Insurance Trust.  Since, the beneficiaries do not get to enjoy the windfall of the policy until after your death, it is a future interest gift.

5. Adequate disclosure

For a gift to be complete in the eyes of the IRS, the gift needs to be adequately disclosed on your gift tax return and include an accurate description and value. If a gift is adequately disclosed on the gift tax return, the statute of limitations is triggered, which generally prevents the IRS from challenging your valuation of the gift after more than 3 years from the date you file.  For example, if you are gifting one share of your S- Corporation to your niece worth $11,000, it might make sense to file a gift tax return disclosing the gift since the S-Corporation is not easily valued. If you do not file the gift tax return, the IRS could come back after your death and dispute the value of the gift.

If you think you may have had taxable gifts in a prior period, it is not too late to file a gift tax return to lock in valuations and properly report the gifts. And in light of tax reform, we now know gift tax is here to stay.

If you are not sure whether gifts you have made during the year – or even during your lifetime – should or should not be reported to the IRS, please contact us.

About the Authors

Cindy H. Mitchell

CPA
Senior Manager, Taxation Services

Jessica L. Tepus

CPA
Senior Manager, Taxation Services

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