Whether or not to file a gift tax return

Depending on your situation, you can use sophisticated estate planning techniques, such as the use of various inter vivos or testamentary trusts, to reduce your family’s exposure to federal estate tax. However, another simpler tool will still provide you with valuable benefits during your lifetime: the annual gift tax exclusion. It allows you to reduce the size of your estate without paying a penny of gift tax.

In fact, you may not even have to file a donation statement (Form 709), although you may choose to do so to be on the safe side.

Background: Under the annual gift tax exclusion, donations are fully exempt from federal gift tax up to a specified limit, without eroding any portion of the unified estate tax exemption and donations. The annual gift tax exclusion for 2022 is $16,000 per beneficiary (compared to $15,000 in 2021). Unlike most other inflation-based adjustments, the exclusion only increases in $1,000 increments.

Therefore, if you give five family members $16,000 each in 2022, a total estate reduction of $80,000, no gift tax is owed. You can repeat this process over several years. In addition, the annual exclusion is doubled to $32,000 per beneficiary per year if your spouse consents to a “split gift”. However, in this case, you must file a declaration of gift, unless you reside in a community property state.

The Unified Inheritance and Gift Tax Exemption, which applies to both lifetime gifts and amounts from your taxable estate, can eliminate gift tax if your generosity exceeds the annual donation amount. exemption from gift tax. However, this reduces the exemption which can then be used to shelter your assets from inheritance tax. The exemption effectively protects $12.06 million from tax in 2022. (It is currently scheduled to drop to $5 million, plus indexation for inflation, in 2026.)

If you have to file a gift tax return, it is usually due before April 15th.e (or the next business day) of the next tax year, on the same date as your federal income tax return. For example, for split donations made in 2022 or donations over the exclusion amount, the gift tax filing deadline is April 18, 2023. If you are requesting an extension for your federal income tax return, the extension s applies to your federal income tax return. come back. This gives you until October 16, 2023 for the 2022 tax year.

On the other hand, you may choose to file a gift return, even if you are not required to, to help establish the value of the assets. This can provide some support in the event of an audit. The IRS frequently reviews estate returns if it suspects the assets are undervalued. If you file a tax return in which you honestly disclose the value of the gifts, the IRS cannot audit the return after three years. Please note: This exemption rule does not apply in the event of fraud or non-disclosure of assets.

Last call: Discuss the details with your professional advisor. Then take the approach that best suits your situation.

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