Technically speaking, whenever you give a gift to someone, you have to follow the gift-tax rules. You don’t have to file a gift tax return every time you give someone a birthday present or a bouquet of roses, but it’s useful to know when the gift tax – embodied in IRS’ Form 709 – needs to be dealt with. It’s better to know the rules and follow them than to have to deal with the IRS with an unexpected tax.
The purpose of IRS Form 709 is to report gifts that are subject to gift and generation-skipping transfer taxes, as explained in The Motley Fool’s article, “Form 709: Do You Need to File a Gift Tax Return?” While this sounds like another unpleasant task to add to your to-do list, in actuality the IRS has some favorable rules that make many gifts exempt from these reporting requirements.
The annual exclusion lets you give up to $14,000 in cash or property to another without having a taxable gift, which prevents most of the regular holiday or birthday gifts from being taxable. Unlimited gifts to spouses are also typically permitted without having to file Form 709. This annual exclusion applies to each person receiving a gift-so if your child is married, you can give $14,000 to your child and another $14,000 to her spouse without any gift tax. The same thing works for your spouse: he can make $14,000 gifts to as many people as he wants, regardless of the gifts that you’ve made.
A special rule allows a spouse in a married couple to make double-sized gifts and have them viewed as made equally by both spouses. This might keep you from paying a tax, but you’ll still have to file a gift tax return in order to claim it. There are other exclusions that will keep you from having to file Form 709, such as the educational exclusion and the medical exclusion. These aren’t considered taxable gifts, so no gift tax return is necessary. However, you must make the “gifts” directly to the institution, not the beneficiary, to qualify for this valuable exclusion.
Even if you made a taxable gift, the tax code gives you some help. The federal gift and estate tax provides for gifts made during your lifetime to be treated the same as gifts made from your estate after your death. Each person has a lifetime exemption from gift and estate tax which stands at $5.43 million in 2015. So even after you use up your $14,000 annual exclusion, any remaining gift amount applies towards your lifetime exemption amount.
Gift tax returns are frequently needed for more complex estate planning strategies, so talk with a qualified estate planning attorney about future interests and generation-skipping issues. He or she can create a wise strategy for your situation and will take care of preparing the Form 709 so that you meet all the requirements.