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Marc A. Hebert's Money Sense: When is it necessary to file a gift tax form with the IRS?

By MARC A. HEBERT
August 11. 2017 7:26PM




Have you given or received a gift lately? If so, there might be some tax consequences for you. Here are a few things to review.

First, just what is considered a gift? According to the IRS, a gift is any transfer to an individual either directly or indirectly in which full consideration (measured in money or money's worth) was not received in return. The gift tax was established to prevent citizens from avoiding the federal estate tax by giving away their money before they die.

With each transfer, there is the potential to incur a gift tax. The tax is the responsibility of the person giving the gift (donor) not the recipient (donee). However, if the donor does not pay the tax, then the donee might be obligated to do so.

For federal tax purposes, gifts are reported on IRS Form 709 by April 15 following the year in which the gift was made. A few states also impose a gift tax, but not New Hampshire.

As is usual with tax-related activities, there are some exceptions. You do not have to pay tax on gifts that are less than an annual exclusion limit. This amount changes most every year. Currently, the annual exclusion is $14,000 per recipient. Gifts for birthdays and holidays usually fall in this category.

You can "split" gifts with your spouse; in other words, treat all gifts made by either spouse during the year as one-half from each. You will need to file gift tax returns to reflect your choice. The splitting of the gift enables you and your spouse to effectively use each other's annual exclusion.

Gifts to your spouse, provided he or she is a U.S. citizen, that qualify for the marital deduction are also excluded from the gift tax. It should be noted that gifts to others are not excluded - your children, nieces and nephews, and complete strangers are all subject to the gift tax.

You also may make payments directly to a provider on someone else's behalf for qualified tuition or medical expenses, and these will not be counted as gifts for gift tax purposes.

Gifts to charities that qualify for the charitable deduction are excluded from the gift tax. Filing is not required as long as you transfer your entire interest in the property to qualifying charities. However, if you are required to file a return to report gifts to noncharitable beneficiaries, then all charitable gifts must be reported as well.

If you made a gift of property that's difficult to value, you might want to report the gift even if you're not required to do so. This is to establish the gift's taxable value. If you do file, the IRS generally has only three years to challenge the gift's value. If you don't report the gift, the IRS can dispute the value of your gift at any time in the future.

As mentioned, if your gift isn't exempt from taxation, you'll need to file a gift tax return. But that doesn't mean you have to pay a gift tax. Generally, each taxpayer is allowed to make taxable gifts totaling $5,490,000 (in 2017) over his or her lifetime before paying any gift tax. Filing the gift tax return helps the IRS maintain a running tab on the taxable gifts you have made and the amount of the lifetime exclusion you have used.

If you are making a significant gift, it would be wise to consult a tax professional. This will ensure you have met all of the rules and are prepared for any tax consequences in advance.

Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at mhebert@harborgroup.com. Your question and his response might appear in a future column.


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