When is a Federal Gift Tax Return Required?
For federal gift tax purposes, the value of a gift of property is the fair market value of the property at the time of the gift. Where property is transferred for less than full consideration, the amount by which the value of the property exceeds the value of the consideration is considered a gift and is included in computing the total amount of a taxpayer’s gifts for a calendar year.
The gift tax applies to a transfer by gift regardless of whether: (1) the transfer is made outright or in trust; (2) the gift is direct or indirect; or (3) the property is real or personal, tangible or intangible.
The federal gift tax assumes that all transfers of property by gift are taxable, but there are exceptions. Nontaxable transfers that need not be reported on Form 709 (the United States Gift (and Generation-Skipping Transfer) Tax Return) include:
- Gifts of present interests (see below) within the gift tax annual exclusion amount (currently, $15,000 per donee),
- Direct payments of qualifying medical or educational expenses on behalf of an individual,
- Deductible charitable gifts,
- Gifts to one’s U.S. citizen spouse, either outright or to a trust that meets certain requirements, and
- Gifts to one’s non-citizen spouse within a special annual exclusion amount ($159,000, as indexed for inflation in 2021).
If all your gifts for the year fall into these categories, no gift tax return is required. But gifts that don’t meet these requirements are generally considered taxable and thus must be reported on Form 709 -- even if they’re shielded from tax by the lifetime exemption ($11,700,000 in 2021).
Beware of common errors:
- Future interests. The $15,000 annual exclusion applies only to present interests, such as outright gifts. Gifts of future interests, such as transfers to a trust for a beneficiaries benefit, aren’t covered, so you’re required to report them on Form 709 even if they’re less than $15,000. Be aware, however, that it’s possible for gifts in trust to meet the present interest requirement by giving beneficiaries so-called Crummey withdrawal powers (the right to withdraw a contribution for a limited time after it’s made).
- Spousal gifts. As previously noted, gifts to a U.S. citizen spouse are not reported on Form 709. However, if you make a gift to a trust for your spouse’s benefit, the trust must 1) provide that your spouse is entitled to all the trust’s income for life, payable at least annually, 2) give your spouse a general power of appointment over its assets and 3) not be subject to any other person’s power of appointment. Otherwise, the gift must be reported. And, gifts to a non-citizen spouse: If they exceed the $159,000 annual exclusion, they must be reported whether they’re outright gifts or gifts in trust.
- Gift splitting. Spouses may elect to split a gift to a child or other donee, so that each spouse is deemed to have made one-half of the gift, even if one spouse wrote the check. This allows married couples to combine their annual exclusions and give up to $30,000 to each donee. To make the election, the donor spouse must file Form 709, and the other spouse must sign a consent or, in some cases, file a separate gift tax return. Keep in mind that, once you make this election, you and your spouse must split all gifts to third parties during that tax year.
- 529 plans. You can contribute up to five times the annual gift allowance of $15,000, per beneficiary in a single year without gift tax as long as no additional gifts are made to the same beneficiary during the next four years. This means that you can contribute up to $75,000 ($150,000 for married couples) for your beneficiary today and elect to treat your contribution as made over a five calendar-year period for gift tax purposes. To take advantage of this benefit, you must file an election on Form 709.
Sometimes it may be useful to file a gift tax return, even if one is not required. For example, if you make annual exclusion gifts of hard to value assets, such as interests in a closely held business, a gift tax return that meets “adequate disclosure” requirements will trigger the three-year statute of limitations period for audits. If you don’t file a gift tax return, the IRS has unlimited time to challenge the value of your gifts.
See also: Wealth Transfer Taxes (in 6 minutes)