Though you will never be taxed when you receive a gift, there are instances when the government mandates you pay taxes on a gift you give. Most often, this will be when you give a large sum of money; in 2009, gift amounts under $13,000 were exempt from taxes and do not need to be declared. Gifts that need to be declared are not taxed unless their total value over your lifetime exceeds your lifetime exemption amount. Declaring a gift can be done by filling out a few forms.
Determine the value of your gift. If it was a cash gift, you can use the exact sum. Otherwise, you will need to determine the value of the gift when it was given. You can estimate the gift's value. However, it is best to get a written estimate, in the event that the IRS audits your return. Include a copy of this estimate with your tax forms.
Determine which gifts you need to declare. Gifts under $13,000 do not need to be declared on tax returns, unless the cumulative value of all gifts you give an individual during the calendar year exceeds $13,000. In addition, gifts for educational costs or medical expenses do not have to be declared, as long as they are given directly to the educational or medical organization. If you give a gift with the intent that the recipient will use it for educational or medical expenses, the gift needs to be declared. Gifts to your spouse do not need to be declared.
Obtain a copy of Form 709 if you have given any gifts that need to be declared. Download one at IRS.gov or order one from the IRS by calling 1-800-829-3676.
Fill out lines 1 to 18, which ask for your personal information. If you are married, fill in the sections relating to splitting the gift amounts with your spouse. If you choose to split gifts with your spouse, in effect, that evenly splits the value of all gifts. Half the value of the gift would be applied to each spouse's taxes.
Complete Schedule A. This is an addendum to Form 709 on which you will list all gifts that need to be declared, to whom they were given and their value at the time. A special section on Schedule A relates to the generational-skipping tax; this applies if you gave declarable gifts to unrelated individuals who are more than 37 1/2 years younger than you, or if you gave to relatives more than one generation younger than you. As of 2010, each taxpayer has a $3.5 million lifetime exemption from the generation-skipping tax, so it is unlikely that you will ever need to pay this tax.
Complete Schedule B, which basically is a cumulative list of the amounts of gifts you have declared on previous tax returns. Each person receives a $1 million gift tax exemption. That means unless you exceed that amount in declarable gifts over your lifetime, you will not need to pay any taxes on your gifts. Schedule B is a means by which you and the IRS keep a tally on your gift-giving.
Complete Form 709. The remainder of the form has to do with determining if you have gone over your lifetime gift exemption and need to pay the gift tax. If it appears that you have exceeded your $1 million lifetime limit, consult a tax expert, as the rules for computing the gift tax are separate from the process of declaring gifts on your tax return.
- Form 709
- FairMark.com: Gift Tax
- Internal Revenue Service. "Frequently Asked Questions on Gift Taxes." Accessed April 30, 2020.
- Internal Revenue Service. "2019 Instructions for Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return." Page 8. Accessed April 30, 2020.
- Internal Revenue Service. "2019 Instructions for Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return," Page 3. Accessed April 30, 2020.
- Internal Revenue Service (IRS). "Publication 559: Survivors, Executors and Administrators: Estate and Gift Taxes." Page 26-27. Accessed April 30, 2020.
- Internal Revenue Service. "What's New - Estate and Gift Tax." Accessed April 30, 2020.
- Internal Revenue Service. "Estate and Gift Tax FAQs." Accessed April 30, 2020.
- Federation of American Scientists. "Recent Changes in the Estate and Gift Tax Provisions." Page 1. Accessed April 30, 2020.
- Center on Budget and Policy Priorities. "Ten Facts You Should Know About the Federal Estate Tax." Accessed April 30, 2020.
- Internal Revenue Service. "Instructions for Form 706: Time for Payment." Accessed April 30, 2020.
Megan Mullinger is a freelance writer who has worked previously on her own blog and for Text Broker. She is working on her master's degree in library and informational sciences at Dominican University.