An individual preparing to file a federal tax return will want to think back on gifts given in the prior year. If a gift exceeds a certain threshold, the IRS wants it reported by Tax Day — but only extremely wealthy taxpayers will ever have to pay taxes on their lifetime of gifts.
In 2023, you could have made gifts worth up to $17,000 per recipient without reducing your lifetime exemption, being required to report the gift to the IRS, or paying federal gift tax.
Gifts over that value count toward the lifetime gift and estate tax exemption of $12.92 million (per spouse, if married), rising even higher in 2024.
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What Is a Gift and What Is Not?
According to the IRS, gift tax is applicable when property is transferred from one person to another, with the giver receiving nothing, or less than full value, in return.
The tax applies even when the donor doesn’t consider the transfer a gift.
The IRS defines the federal gift tax broadly, including when the gift is monetary or a physical property, or a donor allowing someone to stay in their property or earn income from the property without getting something equal in return.
Someone who makes an interest-free or reduced-interest loan may also be seen as giving a gift.
When you make a gift other than cash, you must assess the property’s fair market value: the price a willing buyer would pay in the open market. If you’re buying a house from a family member, you might ask for a gift of equity.
Generally, the IRS does not consider these taxable gifts:
• Gifts that are not more than the annual exclusion for the calendar year
• Another person’s tuition, as long as payments are made directly to the educational institution
• Another person’s medical expenses, as long as the payments are made directly to medical service providers
• Gifts to a spouse who is a U.S. citizen
• Gifts to a political organization
• Gifts to IRS-approved charities
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What Is a Gift Tax Return?
Par for the course with the IRS, there’s a form involved if you made a gift exceeding the annual limit: Form 709. It is to be filled out the year after the giving of the gift. So if a relevant gift was given in 2022, the information belongs on the 2023 tax return form.
Information on this form lets the IRS know that a gift has been given that falls within the scope of the gift tax.
Married couples may “split” gifts and essentially double their annual exclusion. If you are married and your spouse consented, you could have given up to $34,000 to an unlimited number of individuals in 2023 with no gift or estate tax consequences. For 2024, that amount rises to $36,000.
Spouses who split gifts always have to file Form 709, even when no taxable gift was incurred.
The gift tax is tied to the estate tax. As of tax year 2023, you can leave up to $12.92 million to relatives or friends free of any federal estate tax. If you’re married, your spouse is entitled to a separate $12.92 million exemption. Clearly this is the province of high earners.
Who Files the Gift Tax Return: the Giver or the Recipient?
Taxes typically fall on the donor, not the recipient.
There may be special circumstances when the recipient will agree to pay the tax. If you make this agreement, the IRS suggests that you contact your tax professional for guidance on how to proceed.
Annual Exclusion for 2023
You could have made an unlimited number of tax-free gifts in 2023 as long as no one received more than $17,000.
If you held back, just know that you can make an unlimited number of tax-free gifts of up to $18,000 in 2024, when the lifetime gift tax exemption increases to $13.61 million per person.
When Do You Need to File a Gift Tax Return?
This follows the regular tax filing deadline, which is April 15 in 2024.
If you need a gift tax return extension when you’re not filing a tax extension for your general income tax return, file Form 8892. This will typically give you a six-month extension.
How to File a Gift Tax Return
First, you use the federal gift tax return Form 709 that’s available online through the IRS. The IRS also provides gift tax return instructions. The agency includes determining if you need to file a form and, if so, for what gifts.
You may need to decide whether you and a spouse will split the gift taxes.
Form 709 is complicated. Whether you’re a seasoned tax filer or filing taxes for the first time, a tax pro could be of great help.
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What Happens If I Don’t File a Gift Tax Return?
You could be fined by the IRS, and the taxing authority is becoming more vigilant in levying these failure-to-pay penalties. The fine equals 0.5% for every month that the tax isn’t paid, based on the amount of the gift. So, as time goes by, the fine gets bigger. If the IRS determines that fraud was involved, the fine can go up to 5%.
If this oversight isn’t discovered in a person’s lifetime, the estate could be assessed the accumulated fine.
How Long Should You Keep Gift Tax Returns?
Keep them indefinitely! They will likely be needed by the executor of your estate.
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The Takeaway
A gift tax return might inspire dread, but it’s simply a way for the IRS to track eligible gifts made in a year and over a lifetime. Most people will never pay gift taxes.
Want to keep tabs on gifts and track all of your money in one place? A money tracker app may be able to help.
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FAQ
What triggers a gift tax return?
The main trigger is exceeding the annual limit of what you can give without taxation. The annual amount per donee is $17,000 in 2023 and $18,000 in 2024.
Do I have to file a gift tax return if I receive a gift?
In general, it’s the donor of the gift, not the recipient, who pays the tax.
What happens if I don’t file a gift tax return?
The IRS may levy fines. If it doesn’t happen in your lifetime, the situation may be uncovered by the IRS after your death, and fines can be levied on the estate.
Photo credit: iStock/VioletaStoimenova
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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