Protection under annual gift-tax exclusion
Did you make gifts to family members in 2017? As long as the gifts did not exceed the limits for the annual gift-tax exclusion, you should have no federal gift-tax worries. You do not even have to file a gift-tax return. And the annual gift-tax exclusion limit, which has not budged in five years, is finally going up in 2018.
However, depending on your situation, you may have to file a gift-tax return, Form 709, for 2017. In some cases, you might file a return even if you are not technically required to do so.
Background: Under the annual gift-tax exclusion, gifts up to a specified limit are completely exempt from the gift tax and don’t erode any of the unified estate- and gift-tax exemption. The annual gift-tax exclusion for 2017 is $14,000 per recipient. Unlike most other inflation-based adjustments, the exclusion increases only in $1,000 increments. But the IRS recently announced that it is raising the exclusion to $15,000 for 2018. (It was last increased in 2013.)
For instance, if in 2017 you gave five family members $14,000 each, for a total of $70,000, you would owe zero gift tax. What’s more, the exclusion is doubled to $28,000 per recipient ($30,000 in 2018) if your spouse consents to join in the gift. However, in the case of this “split gift,” you must file a gift-tax return (unless you reside in a community property state).
When your gifts exceed the annual gift-tax exclusion amount, the unified estate- and gift-tax exemption, which applies to both lifetime gifts and amounts in your taxable estate, can pick up the slack. However, this erodes the exemption that can subsequently be used to shelter your assets from federal estate tax. This exemption effectively shelters $5.49 million from tax in 2017 and will increase to $5.6 million in 2018.
If you are required to file a gift-tax return, it is generally due by April 15 of the following tax year, just like your federal income tax return. For gifts, including split gifts, above the exclusion in 2017, the deadline for the gift-tax return is April 17, 2018. If you apply for an extension for filing your federal income tax return, the extension applies to your gift-tax return. Thus, you may be able to postpone filing until October 15, 2018.
Note that you might file a gift-tax return, even if you are not required to, for purposes of establishing the value of assets with the IRS. This may also provide a measure of audit protection. The IRS frequently audits estates if it suspects that assets have been undervalued. By filing a gift-tax return in which you honestly disclose the value of the gifts, a safe-harbor rule prohibits audits after three years have passed. But this safe-harbor rule does not apply in the event of fraud or inadequate disclosure.
This is not a do-it-yourself proposition. Rely on your professional tax advisers to avoid any dire tax consequences.