The majority of people often offer gifts without considering any potential tax repercussions. However, legally, you must abide by the gift-tax regulations whenever you give someone something. Thankfully, those laws don’t compel you to file a gift tax return each time someone has a birthday or any significant occasion, but it’s crucial to know when you’ll need to become familiar with IRS Form 709. Let’s look more closely at gift tax regulations so that you won’t have to deal with the IRS.
Why the Form 709 is Used
To record gifts that are subject to gift and generation-skipping transfer taxes, use IRS Form 709. While that might sound bad, a number of helpful regulations exempt the vast majority of gifts from reporting requirements.
The most widely used provision is the annual exclusion, which allows anybody to make a tax-free gift of up to $14,000 in cash or property to a recipient each year. The majority of customary holiday or birthday presents are exempt from taxation due to this clause. Furthermore, without having to submit Form 7009, gifts to spouses are typically permitted in an unlimited sum.
Please take note that the yearly exclusion pertains to each recipient of gifts you make. Therefore, if you have a married child, you can give $14,000 to your child and another $14,000 to your child’s spouse without having to pay gift tax on either amount. Similarly, regardless of the presents you’ve already made, your spouse, if you’re married, is permitted to give $14,000 to as many people as they choose.
The fact that one spouse in a married pair can make double-sized presents and have them recognized as made by both spouses equally is due to a particular rule. However, even though this choice can spare you from paying tax, you’ll still need to submit a gift tax return in order to make a claim.
You are also exempt from filing Form 709 if there are other exemptions. The educational exception permits gift-tax-free tuition payments made directly to educational institutions on behalf of others, while the medical exclusion permits a comparable treatment for donations made to cover medical expenses. There is no need to file a gift tax return because these are not taxable gifts.
Reasons why Form 709 isn’t as horrible as you would assume
Form 709 isn’t as onerous as many people believe, even if you’ve made taxable gifts. This is due to the fact that you won’t have to pay any actual gift tax unless you’ve made a sizable donation.
donations made during your lifetime are regarded similarly to donations taken from your estate after your death for the purposes of applying estate and gift taxes since the United States has a unified federal gift and estate tax system. Each person has a $5.43 million lifetime exemption from gift and estate taxes, which is applied against any leftover gifts even after you’ve used up your $14,000 yearly exclusion and any other applicable provisions.
Say, for illustration, that this year you give someone a present of $114,000. The annual exclusion only applies to the first $14,000, thus the remaining $100,000 is a taxable gift. However, there won’t be any tax due because that $100,000 will be deducted from the $5.43 million lifetime exclusion cap. If the value of your taxable estate at the time of your death exceeds the lifetime exclusion that is in effect at that time by more than $100,000, you may owe estate taxes.
Furthermore, for more intricate estate planning methods, gift tax filings are frequently required. Annual exclusions, for instance, do not apply to donations of future interests, which are frequently made when an estate planning attorney creates a trust or other complex gift. Additionally, there may be problems with gifts given to grandchildren, great-grandchildren, and other younger beneficiaries. But in certain circumstances, the individual advising you on the approach will normally handle Form 709 preparation as well, making sure you satisfy all standards.
Form 709 submission
Since gift tax returns are often due on April 15 of the year following the gift, you can include them in your regular tax planning. Furthermore, if you request an extension for your regular income tax return, you will also be granted one for your gift tax filings.
Although many people find Form 709 intimidating, there is nothing to be afraid of. Most of the time, it just helps to inform you of your current situation with regard to the amount of your lifetime exemption that is still available to you before you may be subject to tax liability.
