Transferring Your Legacy
Avoid the Gift Tax Return Trap
You don’t owe gift taxes and aren’t likely to because of the lifetime estate and gift tax exclusion, so you don’t have to file a gift tax return. Right? Wrong, in a number of instances.
You might need to file a gift tax return, even if you won’t owe gift or estate taxes.
For 2022, the lifetime individual estate and gift tax exemption is $12,060,000. Married couples potentially can exclude twice that amount, or $24,120,000. There’s also the annual gift tax exclusion amount, which increased to $16,000 for 2022. You can make gifts up to $16,000 per beneficiary during the year, and they won’t count against your lifetime exclusion amount. You can make these gifts to any number of people during the year, and there’s no lifetime limit. A married couple can make joint gifts up to $32,000 per beneficiary.
Though your annual gifts or even your entire estate are well below those levels, you still might not be free from worry about filing gift tax returns. The IRS can impose penalties for not filing a gift tax return, even when no tax was due.
Gifts above the annual gift tax exclusion amount of $16,000 made during the year generally must be reported on Form 709. The gifts might not be taxed, because of the lifetime gift tax exclusion. But the gifts reduce the lifetime exclusion and must be reported so the IRS can track your use of the lifetime exclusion amount.
A return also is required when a married couple makes a joint gift that qualifies for the annual exclusion. Each spouse must file a gift tax return to show that each consented to split the gift. If each makes a gift separately that is not more than $16,000 per beneficiary, such as by writing separate checks or giving separate property, a return is not required.
Gifts below the annual exclusion amount might have to be reported if they are not of “present interests,” because they won’t qualify for the annual exclusion. A gift with restrictions, whether given to a trust or directly to an individual, might not be of a present interest and might not qualify for the annual exclusion, triggering a reporting requirement.
You might ask how the IRS would know about the gifts if you don’t report them. The IRS realized a few years ago that people weren’t filing gift tax returns when they were required to. So, it began clamping down on unfiled gift tax returns and searching for gifts that should have been reported.
Of course, after someone passes away if the IRS audits the estate the auditor will go through the person’s financial records in search of gifts that weren’t reported. But the IRS also can search for unreported gifts during your lifetime. For example, it searches public property records in some states, such as real estate title records. Transfers that appear to be between relatives or that were made without compensation can be compared to filed gift tax returns. Also, some states search aggressively for unreported gifts and share information with the IRS.
If the IRS doesn’t catch the failure to file during your lifetime, it can find it when auditing your estate and impose the penalty on your estate. And the penalty and interest will accrue from the date the gift tax return should have been filed.
Don’t assume that no gift tax return is due because a gift isn’t taxable. Consult an estate planner or go to the IRS website at www.irs.gov and take a look at Form 709 and its instructions to see if you need to file a return.
The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.
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