A gift tax, as defined by the Internal Revenue Service (IRS), “is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not”.
The donor is usually the one to pay the gift tax. To avoid having to report the gift and pay the tax, the following criteria must apply:
- Gifts not more than the annual exclusion for the calendar year (see annual exclusions below)
- Gifts of tuition or medical expenses
- Gifts to your spouse (under $152,000)
- Gifts to a political organization
- Gifts to charitable organizations
2019 Annual Exclusion: $15,000 to each donee if you are single; $30,000 to each donee if you are married.
If the gift tax applies, the donor would file a Form 709, United States Gift Tax Return.
- Form 709 is only applicable to individuals and is due at the same time as the individual tax return, April 15th.
- If a trust, corporation, or partnership makes a gift donation, then the beneficiaries become the donors and they would file the gift tax return with their individual tax return, if applicable.
- If the donor is a married couple and they gift over the $30,000 threshold, they would each file a Form 709 for 50% of total gift; for example, if they gifted $100,000 to someone, then each of them would file Form 709 for $50,000.
- Certain gifts, called future interests, are not subject to the annual exclusion and a gift tax return must be filed even if the gift was under the $15,000 threshold.
- If the donor fails to file the return, or passes before filing, then the donee would have to pay the tax on the gift.
Does the donor have options for not paying the tax?
Yes! The donor can either pay the tax in the year it was given (tax calculated using tax table, see Table 1 below) or they can elect to have it added to their lifetime exemption. The lifetime exemption is currently at $11.4 million and any amount over that would be taxed at 40%. This means that all the gifts that you give over your lifetime are deducted from the $11.4 million and as long as your estate does not go over that at time of death, then the gifts are tax free. Form 709 has to be filled out whether you are making that election or not.
Guidelines for Non-Residents:
Non-residents, who give a tangible gift (such as real estate or an automobile) to someone who resides in the United States, have the same requirements to file; they are not excluded from the gift tax return and must file if they:
- Gave any gifts of future interests
- Gave gifts of present interest to any donee (other than spouse) over $15,000
- Gave gifts to spouse exceeding $152,000
Non-Residents who give intangible gifts (such as cash) to U.S. residents do not have to file a gift tax return.
As defined by the IRS, “The U.S. situs property differs for gift and estate tax purposes. For gift tax purposes it includes real estate located in the U.S., like vacation homes, and tangible assets located in the U.S., like a car licensed and garaged in the U.S. (IRC §2511(a)). U.S. situs property for gift tax purposes does not include intangible assets like U.S. stocks, bonds, mutual funds, or bank, brokerage and trust accounts, even if the custodians for those assets and accounts are located in the U.S. (IRC §2501(a)(2))”.
Furthermore, the donee would need to report the gift on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, with their individual taxes in the year that the gift was made.