Do You Need to File a Gift Tax Return?
By: Ingrid Johnson
The holidays are upon us and even though the holidays may mean more than packages, boxes, and bags, gifting during the holidays can put a twinkle in your eye and thaw your heart as the world slowly freezes over for the winter.
But have your dreams of sugar plum fairies been interrupted by the unwelcome thought of gift taxes? No need to bah humbug the thought of holiday gifting yet—this article should give you some hope, or at least answer some of your questions about gift taxes.
General Rules Regarding Gifts
You can gift up to $16,000 per person in the year 2022. This number is set to increase in 2023 to $17,000. This means that you can gift $16,000 to each of your grandchildren, for example, this year without having to file a gift tax return. However, keep in mind this is the total for the year. If you gifted $10,000 to your grandson for his birthday, you can only gift him $6,000 more for Christmas to stay under this annual gift exclusion amount.
Exception to the General Rules
There are some exceptions to the general rule that gifts have to stay below $16,000 to avoid gift tax consequences.
- Spouses enjoy an unlimited marital deduction so you can gift to your spouse without having to file a gift tax return.
- Note: if your spouse is not a U.S. citizen, there is a $164,000 cap in 2022 for annual gifts to your non-citizen spouse.
- You can pay qualifying educational or medical expenses on behalf of someone else directly to an educational institution or health care provider.
- Note: you should speak to an estate planning attorney or tax professional to ensure the expenses are ‘qualifying’ expenses according to the IRS. Also make sure to note the requirement that the expenses must be paid directly to the institution or care provider.
- Gifts to charitable organizations, political organizations, or other tax-exempt organizations may not require a gift tax return. You should speak with an estate planning attorney or tax professional to make sure your gifts do not have gift tax consequences.
When a Gift Tax Return is Required
When do you need to file a gift tax return? Here are some scenarios where you will likely have to file a gift tax return:
- You gift at least one person more than $16,000 in 2022.
- Keep in mind that just because you have to file a return, doesn’t mean you will actually have to pay any tax on the gift. The amount over and above $16,000 would eat into your unified credit, which is the amount you are able to gift during your life and upon your death without paying gift or estate tax. In 2022, the unified credit is $12.06 million, but is scheduled to be reduced by about half as of January 1, 2026.
- You gave gifts of future interests instead of present interests. This concept is beyond the scope of this article but the key takeaway is, if you gifted assets to a trust, you should talk with your estate planning attorney to see if a gift tax return is required.
- You gifted more than $164,000 to a non-citizen spouse.
- You want to split gifts with your spouse. What does this mean? Each person can give up to $16,000 in 2022 without having to file a gift tax return, which means a married couple can gift up to $32,000. Perhaps one spouse owns stock that is worth $32,000. Even though only one spouse’s name is on the stock certificate, both spouses can split the gift and give $16,000 each of stock to the same person without going above the annual exclusion amount. To split gifts, you will have to file a gift tax return.
- Note: gift splitting is an all-or-nothing concept. If you want to split one gift in 2022, you have to split all gifts in 2022.
- You gifted certain property that was held jointly or was characterized as community property. The concept of community property is beyond the scope of this article and Iowa is not a community property state. However, if you are gifting property located in a different state, you may want to ask your estate planning attorney if there will be any gift tax consequences. Property characterized as community property or property you hold jointly may require you to file a gift tax return.
- There is a special rule for 529 college savings plans. You can essentially advance five years’ worth of gifts by gifting one lump sum of five times the annual exclusion amount and electing to treat the gift as counting toward your annual exclusion amount each year. You will have to file a gift tax return to do this but will not use up any of your unified credit.
When a Gift Tax Return is Recommended
After reading this, you may be relieved to find you do not need to file a gift tax return. However, is there ever a time when you are not required to file a gift tax return, but it would be a good idea to do so? Here is some food for thought:
Filing a gift tax return starts the clock for the IRS to challenge your valuation of that gift. The IRS has three years from the filing date to challenge your valuation as long as your gift tax return meets the ‘adequate disclosure’ requirements. Filing a gift tax return for a hard-to-value asset, such as shares in a closely held business, could lock in the value and provide you with more certainty when planning future gifts or crafting your estate plan. It could also allow you to take advantage of certain valuation discounts and lock in those valuation discounts if the IRS does not challenge them.
As a final note, keep in mind that gifts don’t have to be cash. Forgiving a loan, loaning money without interest, or selling an asset for less than fair market value can also be a gift.
This article does not address generation-skipping transfer tax or GST tax. The GST rules and exemptions are similar to the other gift and estate tax rules and exemptions, but you should check with your estate planning attorney or tax professional if you are gifting large amounts to grandchildren, more remote descendants, or other people who are more than 37 ½ years younger than you.
If you think you may need to file a gift tax return, no need to bring out your inner grinch this season and avoid gifts altogether—you can contact me or another estate planning attorney at BrownWinick to help you navigate the gift tax return process and to strategically plan gifts in the future.