When Would I Need to File a Gift Tax Return?
With Christmas and Year-End upon us, many are considering gifting to their loved ones. A gift tax return is a special federal tax filing that must be filed when a non-exempt gift is made…but that doesn’t mean much to most folks so let’s take a few steps back. But first, let me ease your mind, most Christmas gifts, unless you are extraordinarily generous, would not require a gift tax return to be filed.
As of 2023, an exempt gift is a gift, or series of gifts, with a value of less than $17,000 from one person to another, made over the course of a calendar year. Gifts to your spouse or to charities are exempt regardless of size. Each person has their own $17,000 exemption limit. So combined, a married couple can jointly gift up to $34,000 in a year.
What are some common examples of non-exempt gifts? Some examples you encounter in life might be making the down payment on your child’s new home; an expensive car for graduation; paying for your daughter’s wedding; or transferring your home into your children’s name for Medicaid planning. If you make a gift like that, you need to let your tax preparer know and discuss filing a gift tax return.
How would the IRS know what I gave away during my life? Whenever you make a non-exempt gift, you are required to file a gift return. Is there a lifetime max I am allowed to gift before I am required to pay additional taxes? Yes, the Unified Tax Credit is the amount of money you can gift during lifetime or at death, without paying any gift or estate tax. As of 2023, the Unified Tax Credit is almost $13 million. So long as you have not gifted a combined total of $13 million dollars in your lifetime, you won’t owe any additional taxes, but the IRS tracks those gifts so they know if/when to start taxing on future gifts and to determine how much of your estate will be taxed.
As estate planners, we also use exempt gifts to reduce the size of your estates to avoid unnecessary taxes down the road. If a person is nearing the limit of their Unified Tax Credit, we often help them develop a gifting program or gifting trust that is essentially made up of a series of exempt gifts. For example, if a person (Donor) has 3 children and 9 grandchildren, we can set up a gifting trust where the children and grandchildren are beneficiaries, and fund that trust with $204,000.00 (12 x $17,000) per year. If the Donor is married, we can fund that trust with $408,000 (12 x $34,000 per year) of exempt gifts where that money can grow in the children’s and grandchildren’s estates, rather than the Donor’s estate, subject to estate tax.
Have questions about year-end gifts and your estate? Give the attorney’s at Lubnau Law a call at (307) 682-1313.