Articles for Financial Advisors

Federal Gift Tax Return

Federal Gift Tax Return

A federal gift tax return should be filed along with the regular income tax return by April 15 if taxpayer has made: [1] nonexempt gifts over the amount of the annual exclusion to any person or organization during the previous taxable year or [2] gifts over the amount of the annual exclusion to a tax-exempt organization during the previous taxable year. No tax is assessed for such tax-exempt gifts, but the IRS still requires a return.

The IRS does not require gift tax return for gifts between spouses (unless recipient is not a U.S. citizen and the gift exceeds $134,000 for the year) or for gifts for educational or medical expenses, no matter how large the gift.

Timing Gifts

For wealthy people, the timing of making gifts can be important. Although the gift tax is the same no matter when the gift is made during the year, if a taxable gift is made in January, the donor does not have to pay any gift tax until April of the following year. Moreover, any income generated from the gift for the year is becomes fully taxable to the donee (who is likely to be in an income tax bracket that is lower than the donor). Charitable gifts are often given at the end of the tax year, so the giver can receive the income from the asset for most of the year, while obtaining the charitable tax deduction for that same year.

Illegal Gifts-Giving Programs

The IRS scrutinizes complex repeat-gift programs to catch those that cross the line from clever to forbidden. Usually, the IRS catches illegal gift-giving programs when it audits an estate tax return. It then disallows gift tax exemptions for previous gifts, and hits the estate with a nasty tax bill for back gift taxes, interest and penalties. One area the IRS targets, is making a gift that forgives a loan payment due to the donor. For example, some parents have made large loans to their children, intending to forgive repayments of $13,000 a year. The IRS, skeptical of these arrangements to start with, has set out rules you must follow if you want to prove the transaction is a bona fide loan, not a gift in disguise. 
The IRS starts with the presumption that a transfer between family members is a gift. Your client can get around that presumption by showing that he/she really expected repayment and intended to enforce the debt. In making that determination, the IRS considers whether or not: [1] the borrower signed a promissory note, [2] the lender charged interest on the loan, [3] there was security (collateral) for the debt, [4] there was a fixed date the loan was due to be repaid, [5] borrower had the ability to repay, [6] lender demanded repayment, [7] the borrower actually repaid some of the loan, [8] lender’s or borrower’s records indicate the transfer was a loan, and [9] the transaction was reported, for federal tax purposes, as a loan.

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