Failing to file a gift tax return is a common mistake that fouls up many Estate Planning strategies. The gift tax return rules are not what most people think, and that leads to many mistakes and penalties, which could derail your estate planning.
A gift tax return (Form 709) might be due even if no gift taxes are owed. Gifts are tax free up to $11,000 per recipient. Gifts above that amount also are tax free if your lifetime estate and gift tax credit isn’t exhausted. You still must file the return to report gifts over $11,000. The IRS wants a record of how much of the lifetime credit is used.
Married couples can give a “split gift” of up to $22,000 tax free to a recipient. But a return must be filed by each spouse, because each spouse must consent on the other spouse’s return to the split gift. When making cash gifts, the return requirement is avoided if each spouse writes a separate check and no gifts are above $11,000.
A gift worth less than $11,000 also might have to be reported. To be tax free, a gift must be of a “present interest.” Gifts to trusts or that have restrictions might not be of present interests, making them taxable. That means a return is due, no matter how small the gift. Check with a tax accountant and a estate planning advisor if in doubt.
Gifts to minors aren’t reportable if the children are minors and the gifts are for legal support obligations of the donor. Support obligations of parents include housing, food, clothing, and medical care. Items that aren’t legally required support or those that are paid after the child reaches majority are considered gifts subject to tax.
Filing a gift tax return is the only way to start the statute of limitations running. With a gift of property, the IRS could challenge the value you placed on the property. If you file a return, the IRS has six years to challenge the value if it believes you understated the value by 25% or more. Otherwise is has three years. If no gift tax return is filed, there is no statute of limitations. The gift’s value can be challenged even after your death. It is especially important to get the statute of limitations running when the gift is part of a family limited partnership, a trust, or hard to value property. The IRS loves to challenge the valuations placed on those gifts.
Once a gift tax return is filed, keep a copy for life. The information on the returns can affect the estate tax. If the gift tax returns aren’t available, your heirs could end up paying the taxes a second time.