Published on March 31, 2022 by Jamie Hargrove in Retirement Daily
Here’s a rundown of some of the most common scenarios involving gift tax returns.
Jamie Hargrove was featured as a guest contributor to Retirement Daily, a section of TheStreet.com with this article published on March 31, 2022. The article is also available on the TheStreet.com.
Filing a gift tax return is something that might feel a little bit gratuitous — after all, you were gifting something, not accumulating income, so why would the IRS possibly need to be in the loop?
Well, for better or for worse, once the sum of your gifts over your lifetime becomes large enough, the IRS might need to be involved. This is because gift-giving, in the current legal climate, is often a strategy used for avoiding taxes, including estate taxes and other types of taxation.
Luckily, knowing whether you need to file a gift tax return is actually pretty easy. The IRS has established clear guidelines regarding who needs to file a gift tax return and, just as importantly, who can skip this particular filing. And unless you’ve gifted more than $11.7 million over the course of your lifetime, you likely won’t owe taxes on those gifts. Let’s take a closer look…
Tax time is just around the corner, and those of us generous enough to use up gift-giving exclusions are going to have to file on those gifts. Here’s a rundown of some of the most common scenarios involving gift tax returns.
I gave my old car to my daughter last year. Do I need to file a gift tax return?
More than likely. If your car was worth more than $15,000, yes, you would need to file a gift tax return. With the average value of used cars being higher than ever — about 28 percent more compared to last year — it is very likely that your generous gift to your daughter will require you to file a gift tax return.
If the title to the car was in both your and your spouse’s names, then the car would be considered a gift from both of you, and the threshold becomes $30,000. This might give you a little bit more wiggle room. Still, be sure to keep these figures in mind.
I added $50,000 to my son’s down payment on his new house. Do I need to file a gift tax return?
Yes. While generous, this $50,000 contribution is undeniably a gift. Even if the gift was from both you and your spouse, it is still over the $30,000 threshold, thus a gift tax return is due.
What if I contribute $20,000 to each of my kids’ 529 plans?
Yes. Gifts to 529 plans are treated like any other type of gift and follow the same rules. This means a $15,000 threshold for gifts from individuals and a $30,000 threshold for gifts from a married couple applies.
I paid a bunch of money last year — way over $15,000 — for my daughter’s college education. Do I have to report that?
Maybe. Payments made directly to financial institutions are excluded from the general gift category. The same goes for any type of medical expenses paid directly to the provider. However, any education or medical expense that is not made directly to the providers — perhaps you put them in a checking account to be used for a specific purpose — are treated like any other gifts and are reportable whenever they exceed $15,000 per person.
If I set up an irrevocable education trust for my grandkids and made a $15,000 gift into the trust for each of my grandchildren, do I need to report that?
It depends on the type of trust. You are probably going to be required to file a gift tax return on any gift into the trust unless the trust is established as a Crummey trust.
A Crummey trust is a trust that gives the beneficiary (or if a minor, his or her guardian) a right to immediately withdraw the gift put into the trust. Only a small portion of trusts qualify as Crummey trusts, meaning a gift filing will likely be necessary.
With these trusts, the intent is not for the beneficiary to make an immediate withdrawal. So why grant the beneficiary a withdrawal right? To put it simply, the withdrawal right makes the gift in the trust a current gift and thus qualifies for the annual exclusion limit ($15,000 in 2021).
This technique is called a Crummey trust after D. Clifford Crummey’s tax court case decision in the 1960s, which ruled in favor of this technique to turn a future gift (and one that didn’t qualify for the annual exclusion) into a current gift (one that does qualify). In other words, giving the beneficiary the right to withdraw — even if they have no intention to do so — helps recategorize the gift and can potentially exempt you from certain tax and filing obligations.
Can I file a joint return for reporting my gifts?
No. All gift tax reporting is based on individuals only. There is no such thing as a joint gift tax return. The IRS form to report gifts is Form 709.
How much gift tax will I pay on gifts over $15,000 (or a $30,000 joint gift)?
For most people, the answer is zero! Gifts that exceed the annual $15,000 exclusion (increasing to $16,000 in 2022) do not automatically generate gift taxes. The gift will be offset by each person’s lifetime exemption, which for 2021 was $11.7 million ($12.06 million for 2022). However, just because you might not need to pay taxes doesn’t mean you won’t need to file–the IRS does keep track of these sorts of things, including how much each individual has gifted over time.
Except for the very wealthy who have made major gift transfers out of their estate to a family trust or to family members, it is not likely that you’re going to pay any gift tax. For example, if you’ve never made any gifts, and you have one child, you would have had to have given your child $11,715,000 before you would start paying gift tax.
If I’m required to file a gift tax return, do I only report the gifts over $15,000?
No. While the criteria for filing a return on gifts begins at $15,000 per person, once you’re required to file a return, you are then required to report all gifts, even those under $15,000. Keep in mind, however, that this amount resets every year (though the values applied might change).
Is there a penalty for not filing a gift tax return or filing it late?
Yes. But the technical rules provide that the penalty is calculated based on the amount of gift tax that was due or would have been due. If you’re like most people and are not going to have any gift tax due on the return, then you will not owe a penalty.
One example is a case in which you hope to initiate the statute of limitations. This is particularly important if you may have gifted something that you think has a low value today but could be of significant value in the future, e.g., cars, certain types of real estate, collectibles, art, other speculative assets, etc. A gift tax return gives the IRS three years to challenge your valuation, assuming you meet all of the pre-established valuation requirements. In more advanced planning scenarios, there can be generation skipping transfer (GST) tax implications that occur when not filing a gift tax return.
Regardless of the gifts you’ve given, plan to give or are even thinking about giving, it is always a good idea to file your taxes on time. In most situations, you can get a six-month extension if you need it. Additionally, there is a separate automatic extension filing (Form 8892) for gift tax returns. However, if you file for an extension to your income tax return, then the gift tax return is also automatically extended, and you won’t need to additionally file Form 8892.
Contrary to what you might assume, the IRS is usually willing to work with you — however, keeping the IRS in the dark will only lead to future problems. Be sure to be transparent about your financial situation and, when necessary, work with an experienced tax professional.