Lesson 66: Gift Tax Returns

Gift tax returns are like the awkward middle child in the family of taxes. They're crucial for estate planning, especially if you're the generous type throwing around gifts. This section breaks down everything you need to know about filing those pesky gift tax returns, primarily using IRS Form 709. Brace yourselves, it's about to get technical—but fun!

Understanding Gift Tax

The gift tax is a federal tax applied to an individual giving anything of value to another person without receiving something of equal value in return. The donor is generally responsible for paying the gift tax. Here is a basic overview:

  • The annual exclusion is $15,000 per recipient for the tax year 2021 (check for current limits).
  • Certain gifts, such as those made to spouses, charitable organizations, and for education or medical expenses, may be exempt.

Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return

IRS Form 709 is used to report gifts and calculate the gift tax liability. The form must be filed if any gifts exceed the annual exclusion or if gifting strategies involve future interests. Below is an example of how to start filling out Form 709:


// Donor's Name:
// Recipient's Name:
// Gift Amount:

Valuation of Gifts

Accurate valuation of gifts is essential for correctly filing Form 709. The value of the gift is its fair market value (FMV) at the time of the transfer. Below is a flowchart illustrating the process of valuing a gift:

graph TD; A["Determine Fair Market Value"] --> B["Identify Comparable Sales"]; A --> C["Use Appraisal if No Comparables"]; B --> D["Calculate Per IRS Guidelines"]; C --> D;

Split Gifts

Married couples may elect to "split" gifts and treat them as made half by each spouse. This can effectively double the annual exclusion amount. For example:


// Spouse 1's Name:
// Spouse 2's Name:
// Total Gift Amount:
// Amount Per Spouse:

Qualified Transfers

Certain transfers are excluded from the gift tax, such as payments made directly to educational institutions for tuition or to medical providers for medical expenses. Here is a decision tree for identifying qualified transfers:

graph LR; A["Is the transfer for education?"] -->|Yes| B["Direct payment to the institution"]; A -->|No| C["Is it for medical expenses?"]; C -->|Yes| D["Direct payment to the provider"]; C -->|No| E["Not a qualified transfer"];

Filing Deadlines and Extensions

Form 709 must be filed by April 15th of the year following the gift. Extensions can be requested using IRS Form 8892. Failure to file on time can result in penalties and interest.

For more detailed information, you may refer to our section on Generation-Skipping Transfer Tax.

Calculating Gift Tax

To calculate the gift tax due, it is essential to consider several factors, including the total value of the gifts and any applicable exclusions or deductions. Below is a sample calculation:


Total Gifts Given: $100,000
Annual Exclusion per Recipient: $15,000
Taxable Gifts: $100,000 - $15,000 = $85,000
Tax Rate (example): 18%
Gift Tax Due: $85,000 * 0.18 = $15,300

It is crucial to use the current tax rate schedule for accurate calculations. The IRS provides this schedule on their website.

Common Mistakes in Filing

Several common mistakes can occur when filing Form 709, which can lead to penalties or an inaccurate tax liability.

  • Failing to include all gifts given during the year.
  • Incorrectly valuing the gifts.
  • Not electing to split gifts between spouses when beneficial.
  • Omitting necessary documentation, such as appraisals.

Gift Tax and Estate Tax Interaction

The gift tax and estate tax are closely related. Lifetime gifts reduce the unified credit available for the estate tax. This is illustrated in the diagram below:

graph TD; A[Lifetime Gifts] -->|Reduce| B[Unified Credit]; B --> C[Estate Tax Liability];

For more on estate tax returns, refer to our section on Estate Tax Returns (Form 706).

Interaction with Other Taxes

Gift tax considerations often intersect with other taxes such as the generation-skipping transfer tax (GSTT). Below is a Venn diagram to visualize these intersections:

Professional Assistance

Given the complexity of gift tax returns and their potential implications for estate planning, it is advisable to seek professional assistance. Estate planners and tax professionals can provide tailored advice and help ensure compliance with all relevant laws and regulations. For a deeper dive, check out this book on advanced estate planning.

Additional Resources

For further reading on related topics, you may find the following sections helpful:

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