Form 709: Do You Need to File a Gift Tax Return?
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Most people give gifts all the time without even thinking about the potential tax ramifications. Yet technically, whenever you give something to someone, you have to follow the gift-tax rules. Fortunately, those rules don't require you to file a gift tax return every single time someone celebrates a birthday or other special event, but it's important to understand when you'll need to become acquainted with IRS Form 709. Let's take a closer look at gift tax rules with an eye toward helping you avoid the need to deal with the IRS.
What Form 709 is for
The purpose of IRS Form 709 is to report gifts that are subject to gift and generation-skipping transfer taxes. That might sound ominous, but a number of favorable rules make the vast majority of gifts exempt from reporting requirements.
The most common rule is the annual exclusion, whereby anyone can give up to $14,000 in cash or property to a person without having a taxable gift. This is the provision that prevents most ordinary holiday or birthday gifts from being taxable. In addition, gifts to spouses are generally allowed in an unlimited amount without having to file Form 709.
Note that the annual exclusion applies to each person to whom you make a gift. So if you have a child who is married, you can give $14,000 to your child and another $14,000 to your child's spouse without incurring any gift tax liability. Similarly, if you're married, your spouse can make $14,000 gifts to as many people as desired, regardless of the gifts that you've made.
A special rule actually allows one spouse in a married couple to make double-sized gifts and have them treated as having been made by both spouses equally. However, although this election may keep you from having to pay tax, you'll still have to file a gift tax return in order to claim it.
Other exclusions also keep you from having to file Form 709. The educational exclusion allows you to make tuition payments directly to an educational institution on behalf of someone else without having to pay gift tax, while the medical exclusion allows similar treatment for gifts toward healthcare costs. Because these aren't considered taxable gifts, no gift tax return is necessary.
Why Form 709 isn't as bad as you'd think
Even if you have made a taxable gift, Form 709 isn't as big of a burden as many think. That's because unless you've made a huge gift, you won't have to pay any actual gift tax.
The U.S. has a unified gift and estate tax system at the federal level, meaning that for purposes of implementing estate and gift taxes, gifts you make during your lifetime are treated similarly to gifts made from your estate after your death. Everyone has a lifetime exemption from gift and estate tax -- $5.43 million for 2015 -- and even after you use up your $14,000 annual exclusion and any other provisions that apply, any remaining gift amount applies against your lifetime exemption amount.
For example, say you make a gift of $114,000 to someone this year. The first $14,000 is covered under the annual exclusion amount, leaving $100,000 remaining as a taxable gift. No tax will be due, though, because that $100,000 will count against the $5.43 million lifetime exclusion amount. At your death, that $100,000 will be added to the value of your taxable estate, and if it's above the then-applicable lifetime exclusion, then you could have estate tax liability.
In addition, gift tax returns are often necessary for more complex estate planning strategies. For instance, annual exclusions don't apply to gifts of future interests, which are common when an estate planning lawyer prepares a trust or other complex gift. In addition, generation-skipping issues can apply to gifts to grandchildren, great-grandchildren, and other younger recipients. In those cases, though, the person advising you about the strategy will typically take care of preparing the Form 709 as well, ensuring that you meet all the requirements.
Filing Form 709
Gift tax returns are generally due on April 15 in the year following the gift, so you can make it part of your general tax preparation. Extensions are also available, and if you extend your regular income tax return, it will also automatically give you an extension for gift tax returns as well.
Form 709 can intimidate many people, but the IRS gift tax form is nothing to fear. Most of the time, it only serves to let you know where you stand in terms of how much of your lifetime exemption you have remaining before you could owe taxes.
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The article Form 709: Do You Need to File a Gift Tax Return? originally appeared on Fool.com.
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