Definition
A Gift Tax Return, officially known as IRS Form 709 in the US, is a document filed by an individual to report the transfer of money, property, or other assets to another person without receiving something of equal value in return. It is used to calculate the gift tax owed, if any, to the Internal Revenue Service. Notably, not all gifts are subject to taxation; there are certain annual and lifetime exclusions.
Key Takeaways
- Gift Tax Return, officially known as IRS Form 709, is a document that’s used to report gifts that are subject to gift and generation-skipping transfer taxes. Such gifts can include money, property, or the privilege to use the property without expecting to receive something of equal value in return.
- The Gift Tax Return must be filed by U.S. citizens or resident individuals or estates who give gifts exceeding the annual exclusion limit in a tax year. For 2022, the annual exclusion limit is $16,000. This means that any gift with a value exceeding this amount will be subject to gift tax and need to be reported.
- Filing a Gift Tax Return does not necessarily mean you owe tax. The amount that exceeds the annual exclusion limit only goes against your lifetime gift tax exemption. As of 2022, the exemption limit is $12.06 million. Only after your gifts exceed this amount in your lifetime would you actually have to pay the gift tax.
Importance
The finance term “Gift Tax Return” is important as it relates to the taxation obligations that arise when someone gives a gift of substantial value.
In the United States, under the IRS regulations, anyone who gifts money or property valued above a specific annual exclusion limit is required to file a Gift Tax Return (Form 709). This term is crucial because it helps regulate the transfer of wealth between individuals while ensuring due taxes are accounted for.
Apart from allowing the IRS to track and tax large gifts outside of estate transfers, it also helps individuals understand their taxation responsibilities and mitigate potential tax liabilities in relation to gifts given.
Explanation
The purpose of the Gift Tax Return, known officially as IRS Form 709 in the United States, is to maintain a fair and equitable taxation system. The government uses this form to keep a record of and tax high-value gifts that individuals give to each other to prevent people from evading wealth or estate taxes.
Essentially, it was created as a means to prevent individuals from giving away substantial amounts of their wealth tax-free before they die. For instance, rather than waiting to transfer their wealth upon death (where it would be liable to estate tax), without the gift tax, individuals could “gift” their wealth to their heirs while still alive.
The gift tax return then acts as an enforcement mechanism for the Internal Revenue Service, forcing people to report large gifts and pay the appropriate tax rates, thus ensuring the fair distribution of tax duties. The current law states that any gift valued at over $15,000 (as of 2021) must be reported on this form.
Examples of Gift Tax Return
Example 1 – Inheritance: Let’s say a father wants to pass on a property worth $600,000 to his son. However, this exceeds the annual gift tax exclusion amount of $15,000 (as for the year 2022). Therefore, the father will have to file a Gift Tax Return for the amount that exceeds the annual limit. It does not necessarily mean he will owe taxes, due to the lifetime exemption, but he still must file the return.
Example 2 – Large monetary gift: An individual wins a lottery and decides to give a hefty sum of $250,000 to his friend. This amount far exceeds the annual gift exclusion. Therefore, the individual must file a Gift Tax Return, form 709, to report this transaction to the IRS. The portion above $15,000 will be counted against their lifetime exemption amount.
Example 3 – Tuition or Medical Expenses: John pays his friend’s college tuition of $30,000 directly to the educational institution, and he also pays $20,000 for his friend’s medical expenses. For IRS purposes, these payments do not count as gifts, so John doesn’t need to file a Gift Tax Return, despite the amounts exceeding the annual exclusion amount. However, if instead John gives this money directly to the friend to use as the friend sees fit, then John would have to file a Gift Tax Return.
FAQ about Gift Tax Return
What is a Gift Tax Return?
A Gift Tax Return, also known as IRS Form 709 in the United States, is a document that those who give gifts that exceed the annual exempt amount must file.
Who should file a Gift Tax Return?
Individuals who give gifts that exceed the annual exemption limit during a single calendar year to a single recipient should file a Gift Tax Return.
When is a Gift Tax Return required?
Form 709 is required to be filed by any person who gives gifts to any single recipient that exceed the annual exclusion limit in any given year, even if no tax is due.
How to file a Gift Tax Return?
To file Form 709, you’ll need to complete it accurately and submit it by the appropriate deadline (usually April 15th) to the IRS. The form should be mailed to the appropriate IRS address.
What is the annual exclusion for gift tax for 2022?
The annual exclusion for gift tax for 2022 is $16,000. This means individuals can give up to $16,000 to any other individual, per year without having to file a Gift Tax Return.
Related Entrepreneurship Terms
- Annual Exclusion
- Lifetime Exemption
- IRS Form 709
- Taxable Gift
- Unified Credit
Sources for More Information
- Internal Revenue Service (IRS): The IRS website can provide accurate and reliable information about the Gift Tax Return. IRS is the U.S government agency responsible for tax collection and tax law enforcement.
- Tax Policy Center: The Tax Policy Center provides independent analyses of current and longer-term tax issues and develops and communicates information on tax policy to policymakers, the media, and general public.
- Investopedia: Investopedia offers comprehensive, educational content about finance topics including gift tax return. Their goal is to simplify complex financial information and decisions for readers.
- TurboTax by Intuit: On the TurboTax website, you can find a variety of resources and articles about various aspects of tax, including Gift Tax Return. They provide explanations in an easy-to-understand way.
