Benefits
To File a Gift Tax Return or Not to
Depending on your situation, you may use sophisticated estate planning techniques, such as the use of various inter vivos or testamentary trusts, to reduce your family’s exposure to federal estate tax. However, another simpler tool still provide ...
Jun. 02, 2022
Depending on your situation, you may use sophisticated estate planning techniques, such as the use of various inter vivos or testamentary trusts, to reduce your family’s exposure to federal estate tax. However, another simpler tool still provide valuable benefits during your lifetime: the annual gift tax exclusion. It allows you to downsize your estate without paying a penny of gift tax.
In fact, you may not even have to file a gift tax return (Form 709), although you might choose to do it as a safeguard.
Background: Under the annual gift tax exclusion, gifts are completely exempt from federal gift tax up to a specified limit, without eroding any part of the unified estate and gift tax exemption. The annual gift tax exclusion for 2022 is $16,000 per recipient (up from $15,000 in 2021). Unlike most other inflation-based adjustments, the exclusion increases only in $1,000 chunks.
Accordingly, if you give five family members $16,000 each in 2022—a total estate reduction of $80,000—no gift tax is owed. You can repeat this process over the course of several years. Furthermore, the annual exclusion is doubled to $32,000 per recipient per year if your spouse consents to a “split gift.” However, in this case, you must file a gift tax return, unless you reside in a community property state.
The unified estate and gift tax exemption, which applies to both lifetime gifts and amounts in your taxable estate, can eliminate gift tax if your generosity exceeds the annual gift tax exclusion amount. However, this reduces the exemption that can subsequently be used to shelter your assets from estate tax. The exemption effectively shelters $12.06 million from tax in 2022. (It is currently scheduled to drop to $5 million, plus inflation indexing, in 2026.)
If you’re required to file a gift tax return, it is generally due by April 15th (or the next business day) of the following tax year, the same date as your federal income tax return. For instance, for split gifts made in 2022, or gifts exceeding the exclusion amount, the deadline for gift tax returns is April 18, 2023. If you apply for an extension for your federal income tax return filing, the extension applies to your gift tax return. This gives you until October 16, 2023 for the 2022 tax year.
On the other hand, you might choose to file a gift tax return, even if you’re not required to, to help establish the value of assets. This may provide some support in case of an audit. The IRS frequently reviews returns of estates if it suspects that assets are undervalued. If you file a gift tax return where you honestly disclose the value of the gifts, the IRS can’t audit the return after three years has passed. Caution: This safe-harbor rule doesn’t apply for fraud or failure to disclose assets.
Last call: Discuss the particulars with your professional advisor. Then adopt the approach that makes the most sense for your situation.