Financial Advice for Retirement, Social Security, IRAs and Estate Planning

When You Should File Gift Tax Returns

Too often people neglect to file gift tax returns. A smart plan is to file a gift tax return even when not required to. In some situations that provides substantial insurance.

Gifts above the annual exemption amount ($13,000 for 2009) potentially are taxable and must be reported on Form 709. The gift might not be taxed, because of the $1,000,000 lifetime gift tax exclusion. Only after the lifetime credit is exhausted is tax due on gifts. Any use of the lifetime credit reduces the credit available to the estate.

A return is required when a married couple makes a joint gift that qualifies for the annual exclusion. Each spouse must file a gift tax return to show that each consented to split the gift. If each makes a gift separately, such as by writing separate checks or giving separate property, a return is not required.

Gifts below the annual exclusion amount might have to be reported if they are not of “present interests,” because they won’t qualify for the annual exclusion. A gift with restrictions, whether given to a trust or directly to an individual, might not qualify for the annual exclusion.

Gifts that are legal support obligations of minors are not reportable, including food, shelter, medical care, and clothing.

Often a gift tax return should be filed even when not required as insurance. The IRS often challenges the value placed on property. It might place a higher value on property than the donor gave it and one above the annual exclusion amount.

Once a return is filed, the statute of limitations starts running. The IRS has three years to challenge the value or any other details of the gift. If the value is understated by 25% or more, the IRS has six years. Without a gift tax return, there is no statute of limitations. The IRS can challenge the value of gifts many years later, even after the donor’s death. When auditing the estate, the IRS can look back at all lifetime gifts. If the IRS wins, the result could be a significant increase in estate taxes.

The best practice: When in doubt, file a gift tax return. Keep all filed gift tax returns for life. Be sure the values placed on assets and other details are well-documented. Take these steps and you will have done much to avoid estate and gift tax problems with the IRS.

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