Gift Tax — Taxing the Partridge and the Pear-tree
‘Tis the season to be gifting! If you are planning on making large gifts in the near future, or if you have made large gifts over the past year, you should consider whether you might have an obligation to file a Gift Tax Return. The IRS specifically excludes gifts from income, so there is no need for the recipient of your generosity to pay income tax on receiving a gift, and it is only in extraordinarily rare cases that you have to pay tax on giving a gift. However, you may be required to file an informational return to inform the IRS about the gift.
First you need to determine if you are indeed giving a gift or not. In a seminal tax case, Commissioner v. Duberstein, the United States Supreme Court defined a “gift” as a transfer that is motivated solely by “a detached and disinterested generosity, out of affection, respect, admiration, charity, or like impulses.” The most obvious gift occurs when you give something to someone you care about, and expect nothing in exchange except their love and happiness. There may be times when something looks like a gift but is not, or vice versa. For example, you may receive a bonus from an employer that does not correspond to hours worked, but actually your employer’s motivation was to reward quality work. That bonus is income to the employee, not a gift from the employer.
On the other end of the spectrum, suppose you transfer title to the family home to your daughter, and in exchange your daughter agrees to pay you installments to total $20,000. Your daughter is paying you for the house, but the value you expect to receive is not as much as the value of what you are giving your daughter. The difference between the $20,000 she is paying and the perhaps $200,000 the house is worth is a gift of $180,000. Additionally, if you are giving her a break on interest, the benefit she receives from the low- or no-interest financing is also a gift. That exchange, which you may have thought of as a purchase agreement, triggers an obligation for you to file a Gift Tax Return.
As a general rule, you only have to file a tax return if you gift one person more than the annual exclusion amount, which is $15,000 for 2018 and 2019. Gifts that cover tuition or medical expenses, gifts to your spouse, or gifts to a political organization do not count. The typical gift that results in a requirement to file a Gift Tax Return is a large gift to a child, grandchild, or other heir. It may be a transfer that you make during your lifetime, but that is ultimately part of your estate plan, such as transferring real estate or adding your child’s name to a large financial account so that your estate will be easier to administer and your heirs will not have to pay as much inheritance tax and estate tax.
If you make a gift of more than $15,000, don’t panic about the tax you will have to pay. Beyond the annual exclusion amount, you also have a lifetime exclusion of $5,490,000 that you can gift and exclude before you have to pay gift tax. If you are a widow/er, then you can also use your deceased spouse’s unused lifetime exclusion amount. There is a very good chance you will not have to pay any gift tax when you file a Gift Tax Return.
If you fail to file a Gift Tax Return, there are penalties for late filing and late payment, and there may be a stressful audit. A Gift Tax Return is a specialized return that not every tax preparer will be able to prepare. You should go to a qualified professional who can prepare a Gift Tax Return for you. Scaringi Law includes Gift Tax Returns in our usual tax preparation repertoire.
If you think there is a chance you might need to file a Gift Tax Return, or if you would like to consult with an attorney about how well-planned gifting now can simplify your estate plan, contact our office to schedule a consultation.