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Are You A Giver? Uncle Sam Wants Details…

When it comes to gathering gift data, there’s no time like the present.  January is a great month to start (and maybe even finish!) your gift tax return.  Gift tax returns have an initial due date of April 15th but the United States Gift (and Generation-Skipping Transfer) Tax Return, also known as Form 709, is already available and ready for you to file early.  Filing a gift tax return usually does not require waiting for other filing forms from the IRS, such as a W2 or 1099, which makes filing early even easier.

Are you unfamiliar with the gift tax or unsure if filing a gift tax return applies to you?

The federal gift tax applies to transfers of assets where the donor relinquishes control and receives nothing or less than market value in the exchange.  The donor is the person who is making the gift and will be responsible for filing the gift tax return and paying the gift tax.  A gift can be something as simple as cash gifts to kids, grandkids, siblings, etc.  It can be a gift of property such as a car, marketable securities, or a home.  Debt forgiveness is considered a gift as well.  If you transferred assets but the gift values do not exceed a certain amount, there may not be a filing requirement.

Present interest gifts given to any one person (excluding your spouse) that exceed the 2023 annual exclusion amount of $17,000 will trigger a filing requirement (increased to $18,000 for 2024).  To qualify as a present interest gift, the recipient must have immediate access and rights to the assets.  The annual exclusion amount is per recipient.  Multiple small gifts can be given to any number of people and if no individual person receives more than $17,000, there will be no filing requirement.  Note that gifts to a U.S. citizen spouse are unlimited.  Gifts to a non-U.S. citizen are limited to $175,000 in 2023. 

Some transfers are not subject to the gift tax, regardless of the amount.  These include transfers to political organizations and certain exempt organizations.  There are also educational and medical exclusions where qualifying expenses paid on behalf of another person directly to a qualifying educational organization or medical care provider are not subject to gift tax.  Additionally, gifts to charities are not required to be reported if those are the only gifts made in a given year.

If you and your spouse want to make the gift splitting election, you are required to file a gift tax return.  This is often needed if one spouse writes most of the checks or initiates a majority of the transfers, and those amounts exceed the annual exclusion.  If one spouse signed a check for $34,000 to one recipient you cannot simply declare that the amount is one half from each spouse and therefore within the annual exclusion amount of $17,000 per donor, even if it was from a joint account. 

Gifts of future interest in any amount will also trigger a filing requirement.  If the recipient does not have immediate access to the assets and instead must wait until a future date, the gift is a future interest and does not qualify for the annual exclusion.  This can include gifts to trusts that are not subject to Crummey withdrawal rights, and therefore any amount would be considered subject to the gift tax.

It should be noted that even if you have a filing requirement, you may not need to pay any gift tax out of pocket.  In addition to the annual exclusion, there is also the lifetime exemption.  This is the total amount of taxable gifts that can be given over a person’s lifetime.  The 2023 lifetime exemption amount is $12,920,000 (increased to $13,610,000 for 2024).  For example, if a gift of $20,000 is gifted to one person in 2023 and the donor is not gift splitting, the gift will be reduced by the annual exclusion amount of $17,000 and the remaining $3,000 will be considered taxable but will reduce the donor’s lifetime exemption amount before any tax would need to be paid out of pocket.

Consult your tax professional regarding the data they will need in order to prepare your gift tax returns or if you’re still not sure if the gift tax applies to you.  You may also want to consider consulting your tax professional or attorney before making any gifts in 2024! 

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