by The gift tax is a federal tax applied to an individual giving anything of value to another person. For something to be considered a gift, the receiving party cannot pay the giver full value for the gift, though they may pay an amount less than its full value.
The gift donor must report the gift on their tax return and pay the gift tax. Normally, the recipient doesn’t have to report the gift. Under special circumstances, the recipient may pay the gift tax.
The federal gift tax was created to prevent taxpayers from giving money and items of value to others to avoid paying income taxes. The gift tax is applied to the donor to prevent undue hardship and to oblige givers to honor their tax liability, as the Internal Revenue Service (IRS) dubs the giver.
The gift tax can be hefty: Rates range from 18% to 40% on a sliding scale, based on how big the taxable gift is. However, there are a lot of exceptions to the gift tax.
The following are generally not subject to gift tax:
- Gifts to a political organization for its use.
- Gifts to the donor’s spouse. An unlimited amount can be gifted tax-free if the spouse is a U.S. citizen. If the spouse is not a U.S. citizen, then tax-free gifts are limited to an annually adjusted value ($159,000 in 2021).
- Medical and educational expenses payments made by a donor to a person or an organization, such as a college, doctor, or hospital.
- Gifts to a charitable organization.
- Gifts that are valued at less than the annual gift tax exclusion rate for that year.
Gift Tax Strategies
There are strategies for avoiding or minimizing the gift tax.
Gift in Trust
Donors can give gifts in excess of the annual exclusion without paying taxes by establishing a special type of trust the Crummey trust is the usual arrangement to receive and distribute the funds.
The gift tax exclusion usually doesn’t apply to money distributed by trusts. But a Crummey trust allows the beneficiary to withdraw the assets within a limited time period say, 90 days or six months. This gives the beneficiary what the IRS calls a “present interest” in the trust and this sort of distribution can qualify as a nontaxable gift. Of course, the recipient can only take out a sum equal to the gift given to the trust.
Gift Splitting
Being married allows you to double your gifts. Remember, the annual exclusion applies to the amount of gift that an individual can give a recipient. That means that even if they file a joint tax return, spouses can each give $15,000 to the same recipient effectively raising that gift to $30,000 per year without triggering the gift tax.
This strategy is known as “gift splitting” and enables wealthy couples to give substantial annual gifts to children, grandchildren, and others. This gift can be on top of, say, tuition paid directly to a grandchild’s school or college which is exempted outright from the gift tax.
Gift Tax Return
The federal gift tax return is known as Form 709. It must be filed under certain conditions by the donor of a gift. Gift recipients normally don’t have to report gifts though they may pay the gift tax, or a percentage of it, on the giver’s behalf (in which case they would have to file the form).
Individuals who give a gift that exceeds the annual or lifetime exempt gift limit established by the IRS must fill out and submit Form 709.6 This form is due on the same date as the individual’s tax return (Form 1040), which is typically April 15 of the year after the gift was made.
Form 709 includes calculations for how much gift tax, if any, is owed. But filing Form 709 doesn’t necessarily mean that you pay the gift tax. If you’ve given a gift that exceeds the annual exclusion maximum ($15,000 in 2021) but is still under the lifetime maximum ($11,700,000 in 2021), then you won’t trigger the gift tax. But you still must report the gift.
How To Complete Form 709
- Determine whether you are required to file Form 709.
- Determine what gifts you must report.
- Decide whether you and your spouse, if any, will elect to split gifts for the year.
- Complete lines 1 through 19 of Part 1—General Information.
- List each gift on Part 1, 2, or 3 of Schedule A, as appropriate.
- Complete Schedules B, C, and D, as applicable.
- If the gift was listed on Part 2 or 3 of Schedule A, complete the necessary portions of Schedule D.
- Complete Schedule A, Part 4.
- Complete Part 2—Tax Computation.
- Sign and date the return.
Who Must File
In general. If you are a citizen or resident of the United States, you must file a gift tax return (whether or not any tax is ultimately due) in the following situations.
- If you gave gifts to someone in 2020 totaling more than $15,000 (other than to your spouse), you probably must file Form 709. But see Transfers Not Subject to the Gift Tax and Gifts to Your Spouse, later, for more information on specific gifts that are not taxable.
- Certain gifts, called future interests, are not subject to the $15,000 annual exclusion and you must file Form 709 even if the gift was under $15,000. See Annual Exclusion, later.
- Spouses may not file a joint gift tax return. Each individual is responsible for his or her own Form 709.
- You must file a gift tax return to split gifts with your spouse (regardless of their amount) as described in Part 1—General Information, later.
- If a gift is of community property, it is considered made one-half by each spouse. For example, a gift of $100,000 of community property is considered a gift of $50,000 made by each spouse, and each spouse must file a gift tax return.
- Likewise, each spouse must file a gift tax return if they have made a gift of property held by them as joint tenants or tenants by the entirety.
- Only individuals are required to file gift tax returns. If a trust, estate, partnership, or corporation makes a gift, the individual beneficiaries, partners, or stockholders are considered donors and may be liable for the gift and GST taxes.
- The donor is responsible for paying the gift tax. However, if the donor does not pay the tax, the person receiving the gift may have to pay the tax.
- If a donor dies before filing a return, the donor’s executor must file the return.
Who does not need to file.
If you meet all of the following requirements, you are not required to file Form 709.
- You made no gifts during the year to your spouse.
- You did not give more than $15,000 to any one donee.
- All the gifts you made were of present interests.
