by Gregory S. Dowell
December 2, 2019
It comes as a surprise to some people to learn that they may have to file a gift tax return to report the funds they gave to their daughter to buy a house. Because we tax the recipient of income from an income tax perspective, it further comes as a surprise to some people when they find out that it is the giver of the gift (usually called the “donor”) who must report and pay any gift tax that is due, rather than the recipient (often referred to as the “donee”). While this is just a brief overview, hopefully this article will shed some light on when gift tax returns must be filed.
To avoid allowing the transfer of wealth to be completely untaxed from generation to generation, US laws require that gift tax (and estate tax) must be paid under certain conditions. Generally, a citizen or resident of the United States must file a gift tax return if gifts were made that totaled more than $15,000 in any one year to someone. While gifts under $15,000 to a recipient are not subject to gift tax return reporting, a donor must total up all of the gifts to any one recipient made during the year to see if the $15,000 threshold has been reached. An exception to this rule is for most gifts to a spouse (although different rules apply if the spouse is not a US citizen and if total gifts exceed $155,000 in 2019). Gift tax returns are also filed individually, even in the case of married couples, although married couples can file gift tax returns that allow the splitting of gifts between them. Some other important notes on filing gift tax returns:
- 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.
- 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.
Most gifts to charities do not trigger the need to file a gift tax return, regardless of the amount that is donated. This is true as long as the entire interest in the property was transferred to a qualifying charities. If only a partial interest was transferred to a charity, a gift tax return must be filed.
If a gift tax return is required to be filed, it is filed annually on form 709 with the Internal Revenue Service. It is due to be filed on April 15th of the year following the year of the gift. An extension of time to file the gift tax return is automatically received if the individual extends her individual income tax return. If the individual income tax return is not extended, then a 6-month extension can be obtained to file the gift tax return by filing form 8892. Just like the individual income tax return rules, extending the time to file the gift tax returns does not extend the time for paying any gift tax that might be due, and penalties and interest will be assessed for the gift taxes not paid by the original due date of the return. In the case of death of the taxpayer, the due date for filing the return is either the due date for filing the donor’s estate tax return on form 706, or the April 15th (or extended) date for filing the decedent-donor’s gift tax return.
Generally, the federal gift tax applies to any transfer by gift of real or personal property (whether tangible or intangible) that was made directly or indirectly, in trust, or by any other means.
The gift tax applies not only to the free transfer of any kind of property, but also to sales or exchanges, not made in the ordinary course of business, where value of the money (or property) received is less than the value of what is sold or exchanged. The gift tax is in addition to any other tax, such as federal income tax, paid or due on the transfer.
The exercise or release of a general power of appointment may be a gift by the individual possessing the power. General powers of appointment are those in which the holders of the power can appoint the property under the power to themselves, their creditors, their estates, or the creditors of their estates. To qualify as a power of appointment, it must be created by someone other than the holder of the power.
The gift tax may also apply to forgiving a debt, to making an interest-free or below-market interest rate loan, to transferring the benefits of an insurance policy, to certain property settlements in divorce cases, and to giving up some amount of annuity in exchange for the creation of a survivor annuity.
The gift tax applies to any digital asset, such as an electronic record, content, or data stored or existing in a binary format, in which the donor transfers a right to use or possess, including virtual currency or other digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value; domain names; images; multimedia; and textual content files.
Bonds that are exempt from federal income taxes are not exempt from federal gift taxes.
There are four types of transfers to third parties that are not considered gifts, do not trigger the gift tax rules, and should not be reported on the form 709:
- Transfers to political organizations,
- Transfers to certain exempt organizations,
- Payments that qualify for the educational exclusion
- Payments that qualify for the medical exclusion.
To expand on the above, the following is taken directly from the instructions to form 709, as printed by the IRS:
The gift tax does not apply to a transfer to a political organization (defined in section 527(e)(1)) for the use of the organization.
Certain exempt organizations.
The gift tax does not apply to a transfer to any civic league or other organization described in section 501(c)(4); any labor, agricultural, or horticultural organization described in section 501(c)(5); or any business league or other organization described in section 501(c)(6) for the use of such organization, provided that such organization is exempt from tax under section 501(a).
The gift tax does not apply to an amount you paid on behalf of an individual to a qualifying domestic or foreign educational organization as tuition for the education or training of the individual. A qualifying educational organization is one that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. See section 170(b)(1)(A)(ii) and its regulations.
The payment must be made directly to the qualifying educational organization and it must be for tuition. No educational exclusion is allowed for amounts paid for books, supplies, room and board, or other similar expenses that are not direct tuition costs. To the extent that the payment to the educational organization was for something other than tuition, it is a gift to the individual for whose benefit it was made, and may be offset by the annual exclusion if it is otherwise available.
Contributions to a qualified tuition program (QTP) on behalf of a designated beneficiary do not qualify for the educational exclusion. See Line B. Qualified Tuition Programs (529 Plans or Programs) in the instructions for Schedule A, later.
The gift tax does not apply to an amount you paid on behalf of an individual to a person or institution that provided medical care for the individual. The payment must be to the care provider. The medical care must meet the requirements of section 213(d) (definition of medical care for income tax deduction purposes). Medical care includes expenses incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, or for transportation primarily for and essential to medical care. Medical care also includes amounts paid for medical insurance on behalf of any individual.
The medical exclusion does not apply to amounts paid for medical care that are reimbursed by the donee’s insurance. If payment for a medical expense is reimbursed by the donee’s insurance company, your payment for that expense, to the extent of the reimbursed amount, is not eligible for the medical exclusion and you are considered to have made a gift to the donee of the reimbursed amount.
To the extent that the payment was for something other than medical care, it is a gift to the individual on whose behalf the payment was made and may be offset by the annual exclusion if it is otherwise available.
The medical and educational exclusions are allowed without regard to the relationship between you and the donee. For examples illustrating these exclusions, see Regulations section 25.2503-6(c).
While the above will not cover all cases and eventualities, hopefully it serves to answer some general questions about gift taxes.