IRS Form 709 Gift Tax Return—Do You Have to File One?
Who must file a gift tax return...and when?
A federal gift tax applies to transfers of property from one person to another whenever the recipient doesn't pay fair market value for the property. A parent might transfer his home to his child for $1, or to a friend for $25,000 under market value. A gift tax would be payable in both cases on the difference between fair market value and what was actually paid.
Likewise, it's not a fair exchange if the recipient receives a gift of cash but doesn't give anything of value in exchange for the money.
The recipient of a gift isn't liable for this tax. The donor is responsible for paying it. You might have to file IRS Form 709, the Gift and Generation-Skipping Transfer tax return, and pay a gift tax if you make one or more transfers of cash or property, but there are several exceptions.
Why Impose Such a Tax?
Large estates are taxed on their value when someone dies and leaves his cash and property to his beneficiaries. A clever benefactor could effectively dodge the estate tax simply by giving his largess away tax-free during his lifetime...if not for the gift tax.
The tax ensures that the IRS doesn't get cut out of the equation because there's no property or cash left to transfer after the decedent's death, but again, there are some loopholes.
Exception #1: The Annual Exclusion
You must file Form 709 if the total value of all the gifts you make to a single person within the same calendar year exceeds $15,000 as of 2018 and 2019. This $15,000 threshold is referred to as the annual exclusion, and it's up from $14,000, where it sat from 2014 through 2017.
The annual exclusion was indexed for inflation in 1997, but it can only be increased in $1,000 increments. This means it can go up each year, but not by more than $1,000. The exclusion for 2009, 2010, 2011, and 2012 was $13,000.
The "annual" in annual exclusion is an important distinction. Technically, you could give your daughter $15,000 on December 31, and another $15,000 on January 1 for a total of $30,000 without incurring a gift tax. The gifts were made in separate calendar years. Of course, you couldn't give her another gift before the next December 31 or you'd go over.
Otherwise, if you give her $15,000 to buy a car and another $15,000 to pay off her credit card debt in the same year, you've actually made a taxable gift to her in the amount of just $15,000—$30,000 less the year's $15,000 exclusion. You're required to file IRS Form 709 to report that $15,000 gift, but you've given $15,000 away tax-free and you have an option to avoid paying the gift tax on that other $15,000 as well.
Exception #2: The Lifetime Exemption
The Internal Revenue Code also provides for a lifetime exemption from gift taxes. Using the $30,000 gift to your daughter as an example again, you can either pay the gift tax due on the $15,000 balance or you can effectively charge that balance to your lifetime exemption.
The lifetime exemption is pretty significant as of 2019. You can give away up to $11.4 million over the course of your lifetime without paying the gift tax. But there's a catch.
The gift tax and the estate tax share this exemption. If you give your son $500,000 in gifts over the course of your lifetime, over and above the annual exclusions, this is subtracted from your estate tax exemption—the one that avoids your estate having to pay an estate tax on its value at the time of your death. You'd be left with $10.9 million to shield your estate from taxation when you die: $11.4 million less that $500,000.
Of course, this won't matter for most folks of relatively modest means. $10 million or so still adequately shields a lot of estates.
This lifetime exemption is also indexed for inflation and it can change annually. It was $11.18 million in 2018.
Exception #3: "Split" Gifts
Married individuals can "split" their gifts between them to double the annual exclusion. Your spouse might give your son $10,000 to buy a car and another $10,000 to pay off his credit card debt. He now has two options. He can file Form 709 and report that he made $5,000 in taxable gifts to his son—the balance over that $15,000 annual exclusion—or he can file Form 709 and report that the two of you have elected to divide the gifts between you.
In this case, each of you is considered to have made a $10,000 gift, each coming in under the $15,000 annual exclusion. No tax would be due even if the entire $20,000 came from an account in your spouse's sole name.
Gift-splitting is a concept often referred to as "legal fiction." Even though your spouse is the one who really made the gifts, the Internal Revenue Code allows you to effectively say, "No, not really, the gifts really came from both of us." But the end result is that no taxable gifts were made, and it's a perfectly legal and legitimate gift tax option.
Exception #4: Gifts to Spouses
The unlimited marital deduction covers gifts made to spouses who are U.S. citizens. As the name implies, you can give as much to your beloved as you like, either before or after your death, free of taxation, as long as you're married.
Gifts made from a spouse who is not a U.S. citizen are taxable, however. The threshold, in this case, is $155,000 as of 2019, up from $152,000 in 2018. Gifts exceeding this amount are subject to the gift tax.
When Is IRS Form 709 Due?
You must file Form 709 whether you're going to go ahead and pay the gift tax on your gifts over the annual exclusion, or if you're going to chalk the gifts up to your lifetime exemption or split them with your spouse. Form 709 lets the IRS know how you want to handle the tax.
IRS Form 709 is due on or before April 15 of the year following the year in which you made the taxable gifts. If you find that you have to file IRS Form 4868 to request an automatic six-month extension of time to file your personal income tax return, this form also extends the time you have to file IRS Form 709.
You can still file IRS Form 8892 to receive an automatic six-month extension to file IRS Form 709 even if you don't have to extend the time to file your personal tax return.
If you're not sure if gifts you've made during the course of the year should be reported to the IRS on Form 709, consult with an estate planning attorney or an accountant to find out.