Choosing the perfect gift for a lawyer can be a delightful challenge, and understanding the tax implications can make the giving experience even smoother. At lawyergift.net, we’re committed to helping you find unique and thoughtful presents for the legal professionals in your life while providing clarity on gift tax matters. Navigate the complexities of gift tax with confidence, ensuring both giver and receiver enjoy the gesture without unexpected tax burdens.
1. Understanding Gift Tax: Giver vs. Receiver Responsibility
Generally, the giver (donor) is responsible for paying the gift tax, not the receiver (donee). The IRS (Internal Revenue Service) imposes this tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. This tax prevents people from avoiding estate tax by giving away their assets before death.
1.1 Delving Deeper into the Giver’s Obligation
The giver pays the gift tax because the government wants to track and tax significant transfers of wealth. Here are more details about the giver’s role:
- Annual Gift Tax Exclusion: The giver can gift up to a certain amount each year to any number of individuals without incurring gift tax. For instance, in 2024, this annual exclusion is $18,000 per recipient.
- Lifetime Gift and Estate Tax Exemption: In addition to the annual exclusion, there is a lifetime gift and estate tax exemption. This is a cumulative amount that applies to both gifts given during the giver’s lifetime and the value of their estate at death. For 2024, the lifetime exemption is $13.61 million per individual.
- Filing Form 709: If a gift exceeds the annual exclusion, the giver must file Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, to report the gift. This form helps track how much of the lifetime exemption has been used.
- No Tax Payment Until Exemption Is Exhausted: Even if a gift exceeds the annual exclusion, the giver does not actually pay gift tax until the cumulative value of their taxable gifts exceeds their lifetime exemption amount.
- Gift Splitting: Married couples can elect to treat a gift given by one spouse as if it were given half by each. This effectively doubles the annual exclusion and lifetime exemption available for that gift.
- Direct Payments: Payments made directly for someone’s medical expenses or tuition are not considered taxable gifts, no matter the amount, as long as they are paid directly to the institution.
1.2 Receiver’s Role: Why They Generally Don’t Pay
The receiver does not typically pay the gift tax because the tax system is designed to track and tax the transfer of wealth from the giver’s estate. This system prevents individuals from sidestepping estate taxes by distributing assets as gifts before death. There are a few instances where the receiver might be involved:
- Disclaimer: If the receiver refuses the gift, it’s not considered a taxable gift.
- Gift Tax Treaty: Depending on the international gift tax treaty.
- Giver Fails to Pay: In extremely rare cases, if the giver does not pay the gift tax, the IRS can seek payment from the receiver. However, this is uncommon.
1.3 Key Differences Summarized
To make it clear, let’s summarize the responsibilities in a table:
| Aspect | Giver (Donor) | Receiver (Donee) |
|---|---|---|
| Tax Responsibility | Primarily responsible for paying gift tax | Generally not responsible for paying gift tax |
| Annual Exclusion | Can gift up to $18,000 (in 2024) per recipient without tax | Receives gifts tax-free up to the annual exclusion amount per donor |
| Lifetime Exemption | Utilizes lifetime gift and estate tax exemption for gifts exceeding annual exclusion | Not applicable |
| Filing Requirements | Must file Form 709 if gifts exceed annual exclusion | No filing requirements unless the giver fails to pay, which is extremely rare. |
| Direct Payments | Payments for medical expenses or tuition paid directly to the institution are not taxable gifts | Benefits from tax-free payments of medical expenses or tuition |
Understanding these distinctions ensures that both parties are clear on their roles and responsibilities when it comes to gift tax.
2. Annual Gift Tax Exclusion: Making the Most of It
The annual gift tax exclusion is a crucial element of gift tax planning. Understanding how it works can help you give gifts without incurring taxes.
2.1 What is the Annual Gift Tax Exclusion?
The annual gift tax exclusion is the amount you can give to any one person in a year without having to pay gift tax. For 2024, this amount is $18,000 per recipient. This exclusion resets each year, allowing you to make tax-free gifts annually.
2.2 How the Annual Exclusion Works
Here’s a detailed breakdown of how the annual exclusion functions:
- Per-Person Limit: You can give up to $18,000 to as many individuals as you like without incurring gift tax. For example, you can give $18,000 to each of your children, grandchildren, and friends without any tax implications.
- No Cumulative Limit: There’s no limit to the total number of people you can give gifts to, as long as each gift is at or below the annual exclusion amount.
- Married Couples: With gift splitting, married couples can effectively double the annual exclusion amount. If both spouses agree, a gift of up to $36,000 (2 x $18,000) can be treated as if each spouse gave $18,000. This requires filing a gift tax return (Form 709) to indicate the consent.
- Gifts Above the Exclusion: If you give a gift worth more than $18,000 to one person in a year, the excess counts against your lifetime gift and estate tax exemption. You won’t pay gift tax immediately unless you’ve already exhausted your lifetime exemption.
2.3 Examples of Using the Annual Exclusion
Here are a few examples to illustrate how the annual exclusion works:
- Example 1: John gives his daughter $15,000 to help with her college expenses. This gift is fully covered by the annual exclusion, so John doesn’t need to report it or pay gift tax.
- Example 2: Mary gives her son $25,000 for a down payment on a house. The first $18,000 is covered by the annual exclusion. The remaining $7,000 will count against Mary’s lifetime gift and estate tax exemption.
- Example 3: A married couple, Tom and Lisa, decide to give their niece $36,000 to help with her wedding. Using gift splitting, they can treat this as if each of them gave $18,000. Both Tom and Lisa must consent to gift splitting and report the gift on their separate gift tax returns.
2.4 Maximizing the Annual Exclusion
To make the most of the annual exclusion, consider these strategies:
- Consistent Annual Gifting: By making gifts up to the annual exclusion limit each year, you can gradually transfer wealth to your beneficiaries without incurring gift tax.
- Gift Splitting: If you’re married, use gift splitting to double the exclusion amount, allowing you to give larger gifts tax-free.
- Gifts to Multiple Beneficiaries: Spread your gifts among multiple recipients to maximize the use of the annual exclusion.
- Non-Cash Gifts: The annual exclusion applies to various types of gifts, including cash, stocks, real estate, and other assets. However, it’s essential to value these assets accurately.
2.5 What gifts are applicable?
Here are some ideas for gifts that can maximize the annual exclusion, especially for the lawyers:
| Gift Ideas | Description | Relevance to Lawyers |
| :—————————————— | :————————————————————————————————————————————————————————————— | :———————————————————————————————————————————————- |
| Cash or Checks | Direct monetary gifts are straightforward and easy to track for tax purposes. | Allows lawyers to use the funds as they see fit, whether for professional development, personal expenses, or investments. |
| Stocks or Bonds | Transferring ownership of stocks or bonds can be a valuable gift, but valuation at the time of gifting is crucial. | Can be a thoughtful way to contribute to a lawyer’s financial portfolio. |
| Real Estate (Partial Interest) | Gifting a partial interest in real estate can be a significant gift, but it requires a professional appraisal to determine the fair market value. | May assist lawyers in building equity or diversifying their investment portfolio. |
| Contributions to 529 Plans | Funding a 529 plan for a lawyer’s children or other beneficiaries can be a tax-advantaged way to save for education expenses. | Supports educational goals for the next generation, aligning with the lawyer’s potential interest in promoting education and future success. |
| Gifts of Art or Collectibles | High-value items require a qualified appraisal to accurately determine their worth. | Can enhance a lawyer’s office or home décor, reflecting sophistication and appreciation for aesthetics. |
| Paying for Tuition or Medical Expenses | Payments made directly to an educational institution or healthcare provider on behalf of someone else do not count as taxable gifts, regardless of the amount. | Directly supports a lawyer’s well-being or their family’s education without impacting gift tax considerations. |
| Setting up a Trust | Establishing a trust, such as an Irrevocable Life Insurance Trust (ILIT) or a Crummey Trust, can help manage and distribute wealth while minimizing estate taxes. | Provides structured financial planning and asset protection strategies, aligning with a lawyer’s understanding of legal and financial frameworks. |
| Gifts of Cryptocurrency | Cryptocurrency gifts are subject to gift tax rules based on their fair market value at the time of the gift. Donors need to accurately report the value and any potential capital gains. | It’s crucial for them to ensure they comply with IRS regulations. |
The annual gift tax exclusion is a powerful tool for managing your estate and providing financial assistance to loved ones. By understanding and utilizing this exclusion effectively, you can make meaningful gifts without incurring gift tax.
3. Lifetime Gift and Estate Tax Exemption: Planning for the Future
The lifetime gift and estate tax exemption is another crucial element in tax planning, allowing you to transfer a significant amount of assets during your lifetime and at death without incurring federal estate or gift taxes.
3.1 Understanding the Lifetime Exemption
The lifetime gift and estate tax exemption is the total amount of assets you can give away during your life and transfer at death before federal estate or gift taxes apply. As of 2024, this amount is $13.61 million per individual. This exemption is cumulative, meaning any taxable gifts you make during your lifetime will reduce the amount available at the time of your death.
3.2 How the Lifetime Exemption Works
Here’s how the lifetime exemption works in practice:
- Unified Credit: The lifetime exemption is often referred to as the unified credit because it combines the gift tax and estate tax exemptions into one.
- Using the Exemption: When you make a gift that exceeds the annual gift tax exclusion, the excess amount counts against your lifetime exemption. You don’t pay gift tax immediately; instead, the taxable portion of the gift reduces the amount of exemption available to offset future gifts or your estate tax at death.
- Portability: If you are married, your unused lifetime exemption can be transferred to your surviving spouse. This is known as portability. To take advantage of portability, the executor of the deceased spouse’s estate must file an estate tax return (Form 706), even if no estate tax is due.
- Estate Tax: At the time of your death, your estate will be valued, and any assets exceeding the lifetime exemption will be subject to federal estate tax.
3.3 Examples of the Lifetime Exemption in Action
Here are a few examples to illustrate how the lifetime exemption works:
- Example 1: Sarah gives her son $500,000 to start a business. After applying the annual exclusion, the taxable amount is $482,000 ($500,000 – $18,000). This amount reduces Sarah’s lifetime exemption from $13.61 million to $13.128 million.
- Example 2: Mark gives his daughter $2 million to buy a house. After applying the annual exclusion, the taxable amount is $1.982 million. This reduces Mark’s lifetime exemption to $11.628 million.
- Example 3: When Emily passes away, her estate is worth $14 million. Since the lifetime exemption is $13.61 million, the taxable estate is $390,000. Federal estate tax will be owed on this amount.
- Example 4: John passes away, leaving everything to his wife Mary. John never used his lifetime exemption. Mary can elect to add John’s unused exemption ($13.61 million) to her own, giving her a total exemption of $27.22 million.
3.4 Strategies for Utilizing the Lifetime Exemption
To effectively use the lifetime exemption, consider the following strategies:
- Annual Gifting: Combine annual gifting with the lifetime exemption to gradually transfer wealth to your beneficiaries.
- Trusts: Establish trusts to manage and distribute assets while minimizing estate taxes.
- Professional Advice: Work with a qualified estate planning attorney and financial advisor to develop a comprehensive plan tailored to your specific circumstances.
- Regular Review: Estate tax laws can change, so it’s essential to review your plan regularly and make adjustments as needed.
3.5 The future of Lifetime Exemption
The lifetime gift and estate tax exemption is set to revert to pre-2018 levels on January 1, 2026, unless Congress acts to extend the current higher exemption. This means the exemption amount will decrease significantly, potentially impacting estate planning strategies. Here’s a detailed look at the implications and strategies to consider:
| Aspect | Description | Implications for Lawyers |
|---|---|---|
| Current Exemption (2024) | $13.61 million per individual (adjusted for inflation annually). | Allows for substantial tax-free transfers of wealth during lifetime and at death. |
| Sunset Provision (2026) | On January 1, 2026, the exemption is scheduled to revert to approximately $7 million per individual, adjusted for inflation from 2017. | Could result in a significant increase in estate taxes for estates exceeding the reduced exemption amount. |
| Tax Planning Strategies | – Make Large Gifts Now: Utilize the current higher exemption to make substantial gifts to beneficiaries. – Establish Trusts: Set up irrevocable trusts to remove assets from the taxable estate. – Review Estate Plans: Update existing estate plans to account for the reduced exemption and potential tax liabilities. | Lawyers need to advise clients to take advantage of the current high exemption limits by making large gifts now to reduce future estate tax liabilities. Setting up irrevocable trusts now can help remove assets from the taxable estate before the exemption decreases. |
By understanding the lifetime gift and estate tax exemption and planning accordingly, you can effectively manage your estate and ensure that your assets are distributed according to your wishes while minimizing tax liabilities.
4. Filing Form 709: Reporting Taxable Gifts
Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, is used to report gifts that exceed the annual exclusion and to track the use of your lifetime gift and estate tax exemption.
4.1 Who Needs to File Form 709?
You need to file Form 709 if you:
- Give a gift to an individual that exceeds the annual gift tax exclusion ($18,000 in 2024).
- Make a gift of a future interest, regardless of the amount.
- Elect gift splitting with your spouse, even if neither gift exceeds the annual exclusion individually.
- Contribute to a 529 plan and elect to treat the contribution as if it were made over a five-year period.
4.2 Key Sections of Form 709
Here’s a breakdown of the key sections of Form 709:
- Part 1: General Information: This section includes your personal information, such as name, address, and Social Security number, as well as information about your spouse if you are electing gift splitting.
- Part 2: Taxable Gifts: Here, you list all gifts made during the calendar year that exceed the annual exclusion. For each gift, you’ll need to provide the recipient’s name and address, a description of the gift, the date of the gift, and its fair market value.
- Part 3: Computation of Taxable Gifts: This section calculates the total taxable gifts for the year by subtracting the annual exclusions from the total gifts.
- Part 4: Tax Computation: This part calculates the gift tax using the unified credit (lifetime exemption). It factors in any prior taxable gifts to determine the amount of the exemption you’ve already used.
- Part 5: Generation-Skipping Transfer Taxes: If you made any gifts that are subject to the generation-skipping transfer (GST) tax, you’ll report them in this section. GST tax applies to gifts made to grandchildren or other skip persons.
4.3 Step-by-Step Guide to Filing Form 709
- Gather Information: Collect all relevant information, including the names and addresses of gift recipients, descriptions of the gifts, dates of the gifts, and their fair market values.
- Complete Part 1: Fill out your personal information and indicate whether you are electing gift splitting with your spouse.
- Complete Part 2: List each gift that exceeds the annual exclusion. Provide accurate descriptions and values for each gift.
- Complete Part 3: Calculate the total taxable gifts by subtracting the annual exclusions.
- Complete Part 4: Compute the gift tax using the tax rates provided in the instructions for Form 709. Factor in any prior taxable gifts and the unified credit.
- Complete Part 5 (if applicable): Report any generation-skipping transfers and calculate the GST tax.
- Review and Sign: Carefully review the completed form to ensure accuracy. Sign and date the form.
- File the Form: Submit Form 709 to the IRS by the due date, which is typically April 15 of the year following the gift. If you have an extension for filing your income tax return, the due date for Form 709 is automatically extended as well.
4.4 Tips for Accurate Filing
- Accurate Valuation: Ensure that you accurately value any non-cash gifts, such as stocks, real estate, or artwork. You may need to obtain a professional appraisal.
- Detailed Records: Keep detailed records of all gifts, including receipts, appraisals, and any other documentation that supports the values you report on Form 709.
- Professional Assistance: If you are unsure about any aspect of filing Form 709, seek assistance from a qualified tax professional.
4.5 Example form
To better understand the filing of the 709 form, here are some examples.
| Scenario | Filing Requirements | Considerations |
|---|---|---|
| Gift Exceeding Annual Exclusion | If you gift an individual more than $18,000 (in 2024), you must file Form 709 to report the excess amount, even if you don’t owe gift tax due to the lifetime exemption. | Ensure accurate valuation of the gift and complete all relevant sections of Form 709. |
| Gift Splitting with Spouse | If you and your spouse agree to split a gift, both of you must file Form 709, regardless of the gift’s value. | Include your spouse’s information in Part 1 and ensure both of you sign the consent section. |
| Gift of Future Interest | Gifts of future interest (i.e., a gift that the recipient cannot immediately use or benefit from) do not qualify for the annual exclusion. You must file Form 709 to report these gifts, regardless of the amount. | Clearly explain the nature of the future interest and its valuation. |
| Election for 529 Plan Contributions | If you contribute more than $90,000 to a 529 plan in a single year and elect to treat the contribution as if it were made over a five-year period, you must file Form 709 to report the election and the allocation of the gift over the five years. | Complete Part 4 to show the annual allocation of the contribution. |
| Gifts to Trusts | If you gift assets to a trust, you must file Form 709 to report the gift, especially if the trust has multiple beneficiaries or complex terms. | Provide detailed information about the trust and its beneficiaries. |
| Gifts of Appreciated Property | If you gift property that has appreciated in value, you must still report the fair market value of the property at the time of the gift. | Accurate valuation is critical, and you may need a professional appraisal. |
| Prior Taxable Gifts | If you have made prior taxable gifts that have used up part of your lifetime exemption, you must still report current gifts on Form 709. | Be sure to include the cumulative value of prior taxable gifts when calculating the gift tax. |
| Gifts of Cryptocurrency | For gifts of cryptocurrency, you need to determine and report its fair market value at the time of the gift. | Keep records of the cryptocurrency’s value and any associated transaction fees. |
| Gifts of Art or Collectibles | Gifts of art or collectibles require a qualified appraisal to accurately determine their worth. | Attach the appraisal to Form 709. |
| Complex Gifts (e.g., Business Interests) | Complex gifts, such as interests in a business, require detailed documentation and valuation. | Seek professional assistance from a tax advisor or appraiser. |
| When No Gift Tax Is Owed Due to Lifetime Exemption | Even if you don’t owe gift tax due to the lifetime exemption, you still need to file Form 709 if the gift exceeds the annual exclusion. | Complete all relevant sections of Form 709 and indicate that no tax is due. |
| Missed Deadline for Previous Gift Tax Returns | You must file Form 709 to report the gift, even if you missed the deadline for filing previous gift tax returns. | Be prepared to pay any penalties and interest for late filing. |
| Gifts to Foreign Nationals or Transfers of Property Located Abroad | Report must still be filed. | Additional information about the recipient’s residency and the property’s location may be required. |
Filing Form 709 accurately is essential for complying with gift tax laws and maintaining a clear record of your gift and estate tax planning.
5. Exceptions to the Gift Tax: What Doesn’t Count?
While many transfers of property are subject to gift tax, certain exceptions allow you to provide financial assistance without incurring gift tax.
5.1 Direct Payments for Medical Expenses
One significant exception is direct payments for medical expenses. If you pay medical expenses directly to a healthcare provider on behalf of someone else, the payment is not considered a taxable gift, regardless of the amount.
- Qualifying Medical Expenses: These include payments for medical care, health insurance premiums, and long-term care services.
- Direct Payment Requirement: The payment must be made directly to the medical provider or institution. Reimbursements to the individual for medical expenses they’ve already paid are considered taxable gifts.
5.2 Direct Payments for Tuition
Similar to medical expenses, direct payments for tuition are also exempt from gift tax. If you pay tuition expenses directly to an educational institution on behalf of someone else, the payment is not considered a taxable gift.
- Qualifying Educational Institutions: These include accredited schools, colleges, and universities.
- Tuition Only: The exemption applies only to tuition expenses. Payments for room and board, books, and other fees are not exempt and may be considered taxable gifts if they exceed the annual exclusion.
- Direct Payment Requirement: As with medical expenses, the payment must be made directly to the educational institution.
5.3 Gifts to Spouses
Gifts to your spouse are generally exempt from gift tax due to the unlimited marital deduction. You can give any amount of property to your spouse without incurring gift tax, as long as your spouse is a U.S. citizen.
- Non-Citizen Spouses: If your spouse is not a U.S. citizen, the rules are different. You can gift up to a certain amount each year (which is indexed for inflation) to a non-citizen spouse without incurring gift tax. For 2024, this amount is $185,000. Gifts exceeding this amount may be subject to gift tax.
5.4 Gifts to Charities
Gifts to qualified charities are deductible for income tax purposes and are also exempt from gift tax. You can donate any amount to a qualifying charity without incurring gift tax.
- Qualifying Charities: These include organizations that are recognized by the IRS as tax-exempt under Section 501(c)(3) of the Internal Revenue Code.
- Documentation: To claim a deduction for charitable contributions, you must keep records of the donations, such as receipts or acknowledgment letters from the charity.
5.5 Other Exceptions
- Political Organizations: Contributions to political organizations are generally not subject to gift tax.
- Business Transactions: Transfers of property in the ordinary course of business are not considered gifts.
- Legal Obligations: Transfers made to satisfy a legal obligation, such as child support payments, are not considered gifts.
5.6 Examples
Here are some examples of exceptions:
| Scenario | Gift Tax Implications |
|---|---|
| Paying a Friend’s Medical Bills Directly to the Hospital | Direct payments to a medical provider on behalf of someone else are not considered taxable gifts, regardless of the amount. |
| Paying a Grandchild’s College Tuition Directly to the University | Direct payments to an educational institution for tuition are not considered taxable gifts, regardless of the amount. |
| Gifting Artwork to Your Spouse Who Is a U.S. Citizen | Unlimited gifts to a U.S. citizen spouse are exempt from gift tax. |
| Donating Cash to a 501(c)(3) Charity | Gifts to qualified charities are deductible for income tax purposes and are also exempt from gift tax. |
| Contributing to a Political Campaign | Contributions to political organizations are generally not subject to gift tax. |
| Paying Child Support as Required by a Court Order | Transfers made to satisfy a legal obligation, such as child support payments, are not considered gifts. |
| Transferring Assets to a Business Partner as Part of a Business Transaction | Transfers of property in the ordinary course of business are not considered gifts. |
| Covering Your Cousin’s Rent Directly | Paying rent directly would generally be considered a taxable gift if it exceeds the annual exclusion. Exceptions do not apply in this case. |
| Buying a Car for a Sibling | Buying a car and gifting it to a sibling would generally be considered a taxable gift if it exceeds the annual exclusion. |
| Gifting Stock to a Friend Exceeding the Annual Gift Tax Exclusion Threshold | Gifting stock exceeding the annual exclusion requires reporting on Form 709 but may not result in immediate gift tax liability due to the lifetime gift and estate tax exemption. |
Understanding these exceptions can help you provide financial assistance to loved ones and support causes you care about without incurring gift tax.
6. Gift Splitting: Doubling the Annual Exclusion
Gift splitting is a strategy that allows married couples to combine their annual gift tax exclusions, effectively doubling the amount they can give tax-free to each recipient.
6.1 How Gift Splitting Works
With gift splitting, a gift given by one spouse is treated as if it were given half by each spouse. This means that a couple can give up to twice the annual exclusion amount to each recipient without incurring gift tax.
- Consent Required: Both spouses must consent to gift splitting. This is typically indicated on Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return.
- Both Spouses Must File: If gift splitting is elected, both spouses must file Form 709, even if only one spouse made the gift.
- Must Be Married: To be eligible for gift splitting, the couple must be married at the time of the gift.
- All Gifts Must Be Split: If you elect to split gifts, you must split all gifts made by either spouse during the calendar year. You can’t choose to split some gifts and not others.
6.2 Benefits of Gift Splitting
- Doubled Exclusion: The primary benefit is that it doubles the annual exclusion amount, allowing you to give larger gifts without using your lifetime gift and estate tax exemption.
- Estate Planning: It allows couples to more efficiently transfer wealth out of their estates, reducing potential estate tax liabilities.
- Flexibility: It provides flexibility in situations where one spouse has significantly more assets than the other.
6.3 Examples of Gift Splitting
- Example 1: John and Mary want to give their daughter $36,000 to help with a down payment on a house. By using gift splitting, they can treat this as if each of them gave $18,000. Both John and Mary must consent to gift splitting and report the gift on their separate gift tax returns.
- Example 2: Lisa gives her niece $25,000. Lisa is married to Tom, and they agree to split the gift. Lisa reports the gift on her Form 709, indicating that she is splitting the gift with Tom. Tom also files Form 709, reporting that he is splitting Lisa’s gift. Each spouse is treated as having given $12,500, which is below the annual exclusion amount.
- Example 3: Sarah and David want to contribute $100,000 to a 529 plan for their grandchild’s education. They can use gift splitting and elect to treat the contribution as if it were made over a five-year period. Each spouse would report a $10,000 gift each year for five years, which is within the annual exclusion limit.
6.4 How to Elect Gift Splitting
To elect gift splitting, follow these steps:
- Consent: Both spouses must agree to split the gifts.
- Form 709: Complete Part 1 of Form 709, providing information about your spouse and indicating that you are electing gift splitting.
- Reporting: Each spouse must report the gifts on their separate Form 709. The spouse who actually made the gift will list the full amount of the gift, while the other spouse will report their half of the gift.
- Signatures: Both spouses must sign the consent section of Form 709.
6.5 Common mistakes
While gift splitting can be a beneficial strategy for married couples, there are several common mistakes that can undermine its effectiveness. Here are some key errors to avoid:
| Mistake | Description | Consequences | How to Avoid |
|---|---|---|---|
| Failing to Obtain Spousal Consent | Both spouses must explicitly consent to gift splitting. | The gift may not qualify for splitting, leading to inaccurate reporting and potential tax liabilities. | Ensure both spouses agree to split gifts and properly indicate this consent on Form 709. |
| Incorrectly Reporting Gifts on Form 709 | Gifts must be accurately reported on each spouse’s Form 709, including the description, value, and date of the gift. | Inaccurate reporting can lead to errors in calculating taxable gifts and using the lifetime exemption. | Double-check all information and consult with a tax professional to ensure accurate reporting. |
| Forgetting to File Form 709 for Both Spouses | Both spouses must file Form 709, even if only one spouse made the gift. | Failure to file for both spouses can invalidate the gift splitting election. | Ensure both spouses prepare and file Form 709 by the tax deadline. |
| Not Splitting All Gifts | If you elect to split gifts, you must split all gifts made by either spouse during the calendar year. You can’t choose to split some gifts and not others. | Splitting only certain gifts can lead to IRS scrutiny and potential disallowance of the gift splitting election. | Understand that the election applies to all gifts made during the year. |
| Making Gifts Before or After Marriage | Gift splitting is only valid for gifts made during the marriage. | Gifts made before or after the marriage cannot be split. | Be aware of the timing of gifts in relation to the marriage. |
| Splitting Gifts with a Non-Resident Alien Spouse | Different rules apply when one spouse is a non-resident alien. | The non-citizen spouse may not be eligible for gift splitting. | Consult with a tax advisor to understand the specific rules for non-resident alien spouses. |
| Overlooking Prior Taxable Gifts | Previous taxable gifts can affect the calculation of gift tax and the use of the lifetime exemption. | Failure to account for prior gifts can lead to inaccurate tax calculations. | Keep detailed records of all prior gifts and factor them into the calculation of current gift tax liabilities. |
| Failing to Value Gifts Accurately | Gifts must be valued accurately at the time of the gift. | Underreporting the value of gifts can lead to penalties and interest. | Obtain professional appraisals for high-value or complex assets. |
