Protection under annual gift-tax exclusion
Did you make gifts to family members in 2017? As long as the gifts did not exceed the limits for the annual gift tax exclusion, you should have no federal gift tax worries. You do not even have to file a gift tax return. And the annual gift tax exclusion limit, which has not budged in five years, is finally going up in 2018.
However, depending on your situation, you may have to file a gift tax return, Form 709, for 2017. In some cases, you might file a return even if you are not technically required to do so.
Background: Under the annual gift tax exclusion, gifts up to a specified limit are completely exempt from the gift tax and don’t erode any of the lifetime unified gift tax exemption. The annual gift tax exclusion for 2017 is $14,000 per recipient. Unlike most other inflation-based adjustments, the exclusion increases only in $1,000 increments. The IRS recently announced that it is raising the exclusion to $15,000 for 2018. It was last increased in 2013.
For instance, if in 2017 you gave five family members $14,000 each, for a total of $70,000, you would owe zero gift tax. What’s more, the exclusion is doubled to $28,000 per recipient ($30,000 in 2018) if your spouse consents to join in the gift. However, in the case of this “split gift,” you must file a gift tax return (unless you reside in a community property state).
When your gifts exceed the annual gift tax exclusion amount, the unified gift tax exemption, which applies to lifetime gifts, can pick up the slack. However, this erodes the exemption that can subsequently be used to shelter your assets from federal estate tax. This exemption effectively shelters $5.49 million from tax in 2017 and will more than double to $11.2 million in 2018. So you would need to be making substantial gifts for this to be a worry.
If you are required to file a gift tax return, it is generally due by April 15th of the following tax year, just like your federal income tax return. If you apply for an extension for filing your federal income tax return, the extension also applies to your gift tax return. Thus, you may be able to postpone filing until October 15th.
Note that you might file a gift tax return, even if you are not required to, for purposes of establishing the value of assets with the IRS. This may also provide a measure of audit protection. The IRS frequently audits estates if it suspects that assets have been undervalued. By filing a gift tax return in which you adequately disclose the gifts, a safe-harbor rule prohibits audits after three years have passed.
This is not a do-it-yourself proposition. There are a number of special rules that might apply to your situation, so consulting with your Marvin and Company, P.C. tax professional is advisable.