If you gift one person more than $13,000 in cash or property in any one year, the IRS generally requires that you file a gift tax return and pay any applicable taxes. While taxing you for giving away your money may seem a bit odd, the law is designed to prevent people from avoiding taxes on large estates, according to Financial Web. Penalties for failing to file include fines and potential jail time.
What Is A Gift Tax Return
A gift tax return, Form 709, is filed whenever you gift one person more than the "annual exclusion amount," which for 2012 is $13,000, according to John Callinan. In many cases, gifts to your spouse do not have to reported, but those to other family members do. Generally, this applies to gifts of both real or personal property, whether tangible or intangible, that you made directly or indirectly, in trust, or by any other means. Even though you are required to file the form, seldom is any tax due. Each gift of $13,000 or more counts against a lifetime exemption, currently $5 million. Until you exceed that exemption, no taxes are due.
If you won't owe any taxes anyway, why file? Failure to file a form 709 can result in a fine of up to $25,000 and a year in jail, even if the filing wouldn't result in taxes being owed, according to Cramer Law Center. Also, the IRS is cracking down: It has begun checking real estate transfer transactions in several states to catch offenders, according to Vogel Consulting.
In addition to penalties for failure to file, the IRS may penalize errors. For example, if you understate the value of the property by 35 percent, you could be penalized for "substantial valuation understatement." If you undervalue by 60 percent, you could be penalized for "gross valuation understatement."
More Taxing to Give
Oddly enough, the person receiving your gift doesn't pay any taxes on it, regardless of amount. The IRS also allows for some exceptions such as gifts to 529 college savings plans or payment of tuition or medical expenses for another person.
- Cramer Law Center: IRS Gift Tax Audits - Yet Another Reason to Avoid “Do It Yourself” Estate Planning
- Vogel Consulting: The IRS Hit List - Real Estate Giving
- Law Offices of John W. Callinan: June 2011: Gift Tax: The Mouse That Roared
- Forbes: Time to File That Gift Tax Return
- IRS: General Instructions
- Financial Web: Annual Gift Tax Regulations – Avoid A Penalty
- IRS. "Estate and Gift Tax FAQs." Accessed Oct. 24, 2020.
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- IRS. "Property (Basis, Sale of Home, etc.)." Accessed Oct. 24, 2020.
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- IRS. "What's New—Estate and Gift Tax." Accessed Oct. 24, 2020.
- IRS. "Frequently Asked Questions on Gift Taxes for Nonresidents Not Citizens of the United States." Accessed Oct. 24, 2020.
- Wolters Kluwer. "Can I Electronically File a 706 - Estate or 709 - Gift Tax Return?" Accessed Oct. 24, 2020.
- IRS. "Where To File - Forms Beginning With The Number 7." Accessed Oct. 24, 2020.
- IRS. "2019 Instructions for Form 709." Page 4. Accessed Oct. 24, 2020.
- IRS. "U.S. Citizens and Resident Aliens Abroad - Automatic 6 Month Extension of Time to File." Accessed Oct. 24, 2020.
Randi Hicks Rowe is a former journalist, public relations professional and executive in a Fortune 500 company, and currently a formation minister in the Episcopal Church. She has been published in Security Management, American Indian Report and Tech Republic.She has a bachelor's in communications, a master of arts in Christian education and a master of business administration.