Why You Need to File a Gift Return, Even for Non-Taxable Gifts

February 9, 2021 - Gifting is a rewarding and smart way to pass assets to your family, friends, or favorite causes. If done correctly and as part of an overall gifting strategy, you can direct your wealth to those you want to benefit and avoid current and future gift, estate, and generation skipping taxes (GST). However, for your gifting strategy to work, you're required to follow a complicated set of rules and regulations that very often require filing a gift tax return.

We've discussed gifting strategies and generational wealth on the Redpath blog in the past, but with tax season already upon us, let's go over the many types of gifts that should be reported on your taxes.

When Should I File My 2020 Gift Tax Return?

The gift tax return deadline to report gifts made during 2020 is the same date as your income taxes: Thursday, April 15, 2021. You can file an extension to extend the due date to October 15, 2021. Of course, if you missed filing a gift tax return in a prior year, you can file your return late – with the understanding that if you owed any tax, you may incur penalties and interest.

Anyone who makes a gift or combination of gifts to an individual or trust with a value during the calendar year in excess of $15,000, the annual gift tax exclusion for 2020, is required to file a gift tax return. Naturally, there are exceptions to this simple rule – in some instances, it may be in your best interest to file a gift tax return even if you're not required to.

Why You Should File A Gift Tax Return

To understand the need for a gift tax return, you need to know a couple basics. Gift, estate, and GST tax can be avoided or minimized by using the annual exclusion ($15,000 for individuals and $30,000 for married couples) and the lifetime exemption ($11.58 million as of this writing). The gift tax return you file with your taxes is used to disclose the gifts and allocate exclusions and exemptions to your gifts.

For instance, a parent decides to gift their child $50,000 for a down payment on a house. The parent has a gift tax reporting requirement. To exclude the gift from taxation, the parent would file a gift tax return to do two things:

• Claim the annual gift tax exclusion for the first $15,000 of the $50,000 gift
• Apply $35,000 of their lifetime exclusion to cover the remainder

This is why it's important to properly file gift taxes with your tax return. If the parent did not file a gift tax return to apply their lifetime exemption, they would owe gift taxes on $35,000 of a $50,000 gift.

Gift and estate tax work in conjunction. Staying with our previous example, let’s also assume at the parent's death, their estate exceeds the lifetime exemption and an estate tax return is filed. The executor filing the estate tax return must disclose all unreported gifts. The child, who is now the executor, discloses the gift their parent made 20 years ago. Penalties and interest for failing to disclose the gift can now be assessed from the date the gift was actually made.

Timely filing a gift tax return is necessary to make the proper gift and GST elections. It also starts the clock on the statute of limitations: The IRS will have three years to challenge the valuation of the gift if it is adequately disclosed on the return. If a gift tax return is never filed, the IRS can theoretically always challenge the value of the gift. 

Types of Gifts that You Should Always File, Regardless of Size

Gifts toward which you've applied the lifetime exemption: As noted in our prior example, if you make a gift in excess of the annual exclusion, you need to file a gift tax return to allocate your lifetime exemption in order to avoid paying gift taxes.

Gift splitting: If married, you can double the amount of your annual exclusion. In 2020, one parent could write a check for $30,000 to their child. By consenting to gifts split, the couple can exclude the gift from gift tax under the annual exclusion. You can only consent to gift splitting by filing a gift tax return. There are many nuances to gift splitting, especially if there has been a gift to a trust. These nuances should be discussed with your tax preparer.

Gifts of hard-to-value assets: Earlier we mentioned that filing a return marks the start of the statute of limitations for valuing a gift. Many of our clients are small and mid-sized family businesses owners who want to gift their children company stock. By filing the gift tax return, the taxpayer can prevent the IRS from challenging the value of the stock gift in later years. This is extremely important to the success of transitioning the business to the next generation through either gift or sale. 

Gifts of future interests: When you establish a trust, you're not making a gift to an individual. The trust is the entity receiving the funds, while the beneficiaries – usually your children or grandchildren – have a future interest in the gift to the trust. Future interests aren't eligible for the $15,000 annual exemption, so you must file a tax return when you make a gift toward them.

Generation skipping taxes (GST): GST allocations are made on a timely filed gift tax return. Certain GST allocations are automatic while others have to be affirmatively elected. To ensure that your GST exemption is properly allocated you must file a gift tax return to protect the elections and your exemptions. Commonly we see a need for GST allocations associated with gifts to trusts.

Gifts to charitable trusts: A gift of a 100% interest to a charity does not require a gift tax return. If you are making a gift to a charitable trust such as a charitable remainder trust a gift tax is required.

There are many different types of gifts and gifting strategies that can help you protect your family's generational wealth or direct assets to the causes you care about. An experienced accountant can establish a structure and strategy that can make your gift go further and avoid potential IRS scrutiny and taxes down the road.