Whether or not you need to file a federal gift tax return depends on the amount of the gift and other factors. The federal gift tax applies to gifts of money or property that you make to someone else. If the total value of the gifts you make to any one person in a single year exceeds the annual exclusion amount ($17,000 per person in 2023 and $18,000 per person in 2024) you may need to file a federal gift tax return (Form 709).
Certain gifts are exempt from federal gift tax and need not be reported. These gifts include gifts to your spouse, gifts to political organizations, and gifts for medical or educational expenses paid directly to a medical or educational institution.
Additionally, you are only subject to federal gift tax if the value of all gifts you make during your lifetime exceeds the lifetime exclusion amount, which is $12,920,000 million for the year 2023 ($25,840,000 for a married couple). The lifetime exclusion amount is adjusted for inflation each year.
In most instances where a gift tax return is necessary, you will not owe any gift tax provided the aggregate of your lifetime gifts is less than the exclusion amount in the year the gift is made. For example, let’s say you were fortunate enough to make a gift to your children in 2022 in the amount of $12,060,000. Since the lifetime limit for 2022 was $12,060,000 you paid no gift tax. Then in 2023 you make an additional gift of $860,000. Even though this second gift when combined with the gift you made last year exceeds $12,060,000, you still owe no federal gift tax because your lifetime exemption increased by $860,000 from 2022 to 2023!
Present Interest Gifts versus Future Interest Gifts
A gift of a present interest is a gift that gives the recipient an immediate right to use or enjoy the property. For example, a gift of a car to a friend is a gift of a present interest because the friend can immediately start using the car.
A gift of a future interest, on the other hand, is a gift that gives the recipient the right to use or enjoy the property at a later time. For example, a gift in trust that provides that the recipient will receive the trust property upon reaching a certain age is a gift of a future interest because the recipient does not have an immediate right to use or enjoy the property.
For federal gift tax purposes, gifts of present interests are generally eligible for the annual exclusion, which means that you can make gifts of up to this amount to as many individuals as you like without incurring a gift tax. Gifts of future interests, on the other hand, are generally NOT eligible for the annual exclusion, and may be subject to gift tax if the value of the gift exceeds the lifetime exclusion amount noted above.
It is important to understand the difference between gifts of present interests and gifts of future interests as it affects the tax treatment of the gifts.
What are the Benefits of Filing a Federal Gift Tax Return
Filing a federal gift tax return ensures compliance with the law. It allows you to report transactions in a way that may be beneficial to you or your heirs in the future.
For example, let’s say you are gifting stock in a closely held business. Reporting the transaction allows you to value those shares of stock. Provided the return is not audited and the valuation challenged, this may provide a great opportunity to save on estate taxes at your death. In other words, utilization of your lifetime gift tax exclusion now can potentially reduce future estate taxes.
Also, filing accurately helps in preventing IRS disputes and provides a clear record of gifts. This assists in financial planning and safeguards both your interests and the recipient’s interests.
Is a Gift Taxable to the Recipient?
Probably not. Gifts are taxed differently than income. The person receiving the gift generally does not owe income tax on the gift, unless the gift is considered income in respect of a decedent.
Income in respect of a decedent (IRD) refers to income that a deceased person would have received if they had lived. This type of income is taxed as part of the deceased person’s estate and is considered income for the beneficiary who receives it.
Examples of IRD include:
- Uncollected salary or bonuses earned by the deceased before their death
- Uncollected dividends on stocks that the deceased owned
- Distributions from an individual retirement account (IRA) or other retirement plan
IRD is taxed as ordinary income and is subject to the same tax rates as regular income. It is also subject to the estate tax if the value of the estate, including IRD, exceeds the estate tax exemption amount.
If you are unsure whether you need to file a federal gift tax return, it is best to consult with a tax professional or attorney for guidance.