What is Gift Tax Return?
A gift tax is a kind of tax that is being levied on the transfer of property or asset from one person to another person when the person who receives the property or the asset does not make the payment in accordance with the fair value of such property or asset. Tax is levied on the person making the gift (known as the donor) and not on the receiver of the gift.
Who Needs to File a Gift Tax Return?
A gift tax is levied to an individual person who transfers an asset to another person for a value less than the fair value of the asset. Thus, in order to consider a transaction as a gift, the receiver of a gift shall be paying any amount less than the fair value of such a gift.
A gift tax return is a tax form that needs to be filed by the donor of the gift if they make a transaction of the gift of value exceeding the prescribed limit, known as gift tax exemption. Thus, the donor of the gift shall file the gift tax return unless otherwise required by the law. The form for a gift tax return is IRS Form 709.
The government allows the married couples to double up the gift exemption limit, in which case the basic exemption limit will increase to twice for the couple.
Requirements to File a Gift Tax Return
The donor is required to file a gift tax returns when then annual gift made to any person during the year does not exceed $15,000. This is the annual limit for the exclusion of gift tax. Also, the limit is based per recipient and the cap is not on the total amount of gift. Thus, a person can make gifts to as many persons as he wants up to $15,000 without attracting gift tax.
Also, there is a lifetime gift exemption limit which allows an individual to make gifts amounting to $11.58 million without attracting the gift tax. Thus, this limit is applicable for a lifetime. One will need to pay gift tax only when the gift limit is exhausted.
Let us understand the requirement of gift tax return with the help of examples.
A person made 10 gifts to 10 different persons amounting to $5,000 each during a relevant tax year.
Here, the total value of gifts made by the person comes out to $50,000. However, the annual limit for gift tax is $15,000 per person and the limit is not on the total amount of gift during the year. Hence, the liability to pay gift tax doesn’t arise during the year since the annual limit of gift exemption amounting to $15,000 per person is not exhausted.
Suppose, in the above example, the current Unutilized balance of the lifetime gift exemption is $11.55 million without considering the gifts made during the year.
Now, although the annual exemption limit is not exhausted, the lifetime exemption limit is exhausted, since, the cumulative balance of lifetime limit comes out to be $11.60 million after considering current gifts of $50,000.
Hence, the liability to pay gift tax will arise.
Common Traps to Avoid
One shall avoid the following traps while filing the gift tax return.
- Gifts shall be adequately disclosed in the gift tax return. If one discloses the gifts adequately, then revenue service can revalue the gifts only till a maximum period of three years, failing which the revenue service gets the authority to revalue the gifts for an unlimited period of time. Thus, details like the nature of the gift and basis of valuation shall be properly disclosed.
- Gifts that fall above the annual gift tax exclusion limit shall also be reported in the return. The gifts although owing to the lifetime exemption limit may not be taxed, but they do exhaust the lifetime exemption limit and thus it is necessary to report them in the return.
- When a joint gift is being made by a married couple, it is important that both the individuals show the gift in their return to show that they both consented for the same.
- One should make sure when a gift is made to a trust, the gift qualifies to be “present interest”. If the same doesn’t qualify to be present interest then the same will not fall in annual exemption limit and will be taxable.
When is there no Requirement for a Gift Tax Return?
A gift tax return is not required to be filed when the following gifts are made:
- Gifts that are given to the spouse.
- Gifts made to a political organization for its utilization.
- Payments made to educational institutions directly for meeting tuition fees.
- Payments made to medical institutes directly or to medical insurance companies directly.
- When payments do not exceed the annual exemption limit of $15,000.
Thus, an individual shall file a gift tax return for the gifts made by him during the year. The return is needed to be filed even if they fall above the annual exemption limit, even though the tax will not be payable. Make sure to give the necessary information in the return to avoid questions from the IRS later.
This has been a guide to what is gift tax return. Here we discuss requirements and examples of the gift tax return and common traps to avoid it. You can learn more about financing from the following articles –