If you want to send up a red flag to the IRS, just give someone money out of the goodness of your heart with no strings attached.
In most instances, gifting a portion of your wealth to family, friends, and institutions is viewed as a display of kindness with only positive repercussions. Unfortunately, the IRS doesn’t necessarily agree. They insist that you file a gift tax return . . . even if there is no tax due.
If you don’t file a gift tax return, the IRS can impose penalties, again even if there’s no tax due. And if you fail to file appropriate gift tax returns during your lifetime, the IRS will likely discover the oversight when it reviews your records following your death and your estate will be liable for the penalties.
There are even penalties for your hard-working tax preparer in certain instances.
Many of our clients assume that they don’t have to file a gift tax return because they never expect to reach the lifetime estate and gift tax exclusion. On the contrary, the IRS demands the returns, so they can keep track of your total gifting for when and if you exceed the exclusion amount.
From an accountant’s point of view, the fundamental thing for you to know about the gift tax is that you can’t assume anything. For example, although you and your spouse file a joint federal income tax return, spouses may not file a joint gift tax return; each individual is responsible for his or her own Form 709.
Or this: Even though municipal bonds are exempt from federal income taxes, they are not exempt from federal gift taxes.
Not to be petty, but you’ll be happy to know the people in Washington looked after their benefactors: according to the IRS, the gift tax can apply to gifts to your your kids but does not apply to a “transfer to a political organization.”
The IRS form report gifts is Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
Instructions for Form 709 run twenty pages of rules, regulations, exclusions, exceptions, elections, and instructions. Here’s a sample paragraph from the first page of instructions:
“If a donor made a taxable gift to a skip person whose generation assignment is changed as a result of Notice 2017-15, any allocation of GST exemption to that gift is deemed void. For more details, see the instructions for Gifts Subject to Both Gift and GST Taxes, later.”
If you can get through all twenty pages of instructions and fully understand what you read, congratulations; you have a future in deciphering high level legalese.
The takeaway from this brief look at the IRS and your gifts should be that you now know to discuss all important gifting arrangements with your CPA or estate planner before you make the gift to make sure you are aware of all the gift tax ramifications and that Form 709 will be properly executed and submitted.