Q: My wife and I made gifts to our children that exceeded the allowed $15,000. My question is what this means in terms of paying a gift tax and filing tax returns. We are not wealthy so it’s not a tremendous amount of money but I inherited some property from my mother and decided to make these gifts. With some other smaller transfers we expect to make it may be $75,000 for each of three children.
You will not owe any gift tax but you will have to file a Form 709, which is the gift tax return. The source of the funds may make this a bit more complicated to answer so I’ll go through two alternatives.
To start, each person is allowed to gift as much as $15,000 per year, to each recipient (donee), without the need to file any gift tax return. To qualify for this gift exclusion, the donee must be able to presently enjoy the property.
Transfers to trusts may need special wording to qualify for this present enjoyment provision. If you have adult children and simply gave them the money then you will qualify for the $15,000 exclusion.
Gift transfers that are made for educational or medical purposes can be exempt without regard to the amount involved. This exemption is in addition to the $15,000 per year and requires that the funds be transferred directly to the educational institution or the medical care provider.
Non-exempt transfers above $15,000 per donee must be reported on the Form 709. This form will (ultimately) lead to a computation of a gift tax, but everyone gets a tax credit against the gift and the estate tax that will eliminate any required payment.
It is only when non-exempt transfers exceed $11.4 million, including transfers during your life and at death, that a tax is actually owed.
The Form 709 is due the same date as your personal tax return and can be extended for six months just like the personal return. If you extend the personal return you automatically also extend the gift tax return.
The Form 709 is not filed with your personal tax return. Instead it is paper-filed with the IRS in Kansas City. Both you and your wife must file your own gift tax returns. You also each get the $15,000 exemption for each child.
You did mention that the source of the funds may be inherited money. I say “may” because perhaps you took the funds from some non-inherited account and just felt able to do so because of the inheritance.
This matters because inherited funds are separate property unless co-mingled or unless you take an action to convert (transmute) the funds to community.
If a gift is made by a married couple from community funds it is treated as made one-half by each. So if the per-child gift is $75,000, it is $37,500 from each. You each get a $15,000 exemption so the gift from each of you is $22,500 per child.
You then each file a Form 709 reporting the three gifts. You each have this tax credit that eliminates the need to pay a tax, but you have to separately track the remaining credit for future gifts or transfers at death by each of you.
If the inherited funds were used to make the gifts, and you did not co-mingle the funds, then the gift is made entirely by you. This generally means a single $15,000 per-child exemption rather than doubling up for a $30,000 per-child exemption.
The tax law allows you to recover both exemptions even when the gift is one spouse’s separate property. To do so the non-donor spouse must consent to treat the gift as made half by him or her. This consent will cause their gift and estate tax credit to be used to offset the tax due.
If the gifted property is yours’ alone, you can have your wife elect to treat half the gift as made by her. This election is made right on the Form 709. There should be no cost to this because you each have a large enough credit that there should never be a need for her to keep her full credit.
James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at firstname.lastname@example.org.