When Does a Gift Require a Gift Tax Return, and Gift Tax?

With lifetime gift and estate tax exemptions at an all-time high in 2020, not as many taxpayers will be subject to federal gift taxes this year. However, that doesn’t mean you won’t have to file a gift tax return.

Nontaxable Gifts

There are a few scenarios that do not involve paying gift tax, but you may still be required to file a Form 709—United States Gift (and Generation-Skipping Transfer) Tax Return—even if your gift falls into the non-taxable threshold. Always consult your tax professional to be certain there is no filing requirement.

The following is a list of scenarios that are considered non-taxable gifts.
 

1. For 2020 and 2021, the annual gift tax exclusion amount is $15,000 per donee, per taxpayer. This means you can give multiple people a gift of $15,000 without having to pay gift tax or file a gift tax return. If you’re married, the annual exclusion is $30,000 per donee. So, if you have three children, you and your spouse could gift $90,000 tax free this year.
2. Gifts for certain medical expenses can be paid directly to the medical institution in any amount without affecting the annual gift tax exclusion. 
3. Gifts for school tuition paid directly to the institution provides parents, grandparents, and other donors the option to pay unlimited amounts for a person’s tuition and not be taxed. Room, board, books, and supplies are not calculated into this exclusion amount.
4. Gifts to your spouse, if they are a U.S. citizen, can be in any amount (certain restrictions apply to gifts to trusts). If they’re not a citizen, the annual exclusion amount is $157,000 for 2020. 
5. Gifts to a political organization or a charitable 501(c)3.

Charitable donations can also be deducted from your taxable income in addition to not being subject to gift tax. Individuals may deduct qualified charitable contributions of up to 100 percent of their adjusted gross income in 2020.

It’s important to note that typically gift tax is paid by the donor of the gift, not the beneficiary. In addition, non-cash gifts made during the donor’s lifetime maintain the basis of the donor, unlike inheritance from an estate, which has received a step-up in basis and would be the fair market value as of the date of death.

Lifetime Gift Exemption

While the annual gift tax exclusion remains at $15,000 this year, many choose to gift over that amount because the lifetime exemption amount is currently much higher at $11.58 million per taxpayer ($23.16 for married couples) in 2020. That means if you’d like to gift your child $50,000 this year, you can choose to apply the $35,000 of your lifetime exemption. You will not be subject to gift tax, but you will still need to file Form 709 in an effort to keep track of your running lifetime exemption amount.

When gift splitting between spouses, they can each use their $15,000 annual exclusion first before beginning to use up their lifetime exemption amounts. Both spouses will need to sign the consent on Form 709, or, in some cases, they may need to file two separate gift tax forms.

Both the tax rate on the cumulative lifetime gifts in excess of the exemption amount and the tax rate on an estate of a taxpayer who passes away this year with an estate valued in excess of the exemption amount is 40%. However, it is important to note that the $10 million (plus CPI, so $11.58M in 2020) lifetime exemption amount, which was part of the 2017 TCJA changes, will sunset in 2026. The lifetime exemption amount will revert back to $5 million (plus CPI, so likely around $6 million in 2027) per person. The IRS has assured that there will be no “claw-back” of gifts made during this window that will later exceed the future, lower lifetime exemption amount. This essentially means that the higher lifetime exemption amounts are “use it or lose it” before the end of 2026.

In essence, making more gifts during your lifetime can reduce your estate tax and could provide you and your heirs with valuable tax savings by implementing the right estate plan.

Next Steps

Our estate planning department is well-versed in strategic planning for gift, estate, and generation-skipping transfer tax. If you would like to implement a plan for your family, please contact me at tgoodall@bpw.com. We’re happy to help.