Most gifts between family members never create a tax bill. A good number of them do create a filing requirement, and the filing is what people miss. Here is how the annual exclusion and the lifetime exemption fit together, and when a gift means you owe the IRS a Form 709 even though you owe it no money.
The annual exclusion
Each year you can give any number of people up to the annual exclusion amount, which the IRS adjusts for inflation, without any reporting at all. The exclusion is per donor, per recipient, per year. A married couple can each give the full amount to the same child, doubling it, and can do the same for that child's spouse and each grandchild. Gifts under the exclusion do not use up any of your lifetime exemption and do not need to be reported.
The exclusion only covers gifts of a present interest: something the recipient can use right now. Cash, a check, and shares moved into the recipient's own account all qualify. A gift into a trust that the beneficiary cannot touch until some later date is a future interest and does not qualify unless the trust is drafted with withdrawal rights (often called Crummey powers) that convert it into a present interest for a window of time.
Two kinds of payments that never count
Section 2503(e) excludes two categories entirely, with no dollar limit and no filing: tuition paid directly to the school and medical expenses paid directly to the provider. The word that matters is directly. Reimbursing your daughter for tuition she already paid is an ordinary gift. Writing the check to the university is not a gift at all for tax purposes. Gifts to a spouse who is a US citizen are also unlimited under the marital deduction. Gifts to a non-citizen spouse have their own annual limit, also adjusted for inflation.
The lifetime exemption
Gifts above the annual exclusion are taxable gifts, but taxable does not mean tax is due. Every person has a lifetime exemption (the basic exclusion amount under Section 2010, adjusted for inflation and changed by Congress from time to time) that shelters taxable gifts during life and the estate at death. A gift above the exclusion reduces the exemption remaining for your estate. Actual gift tax is owed only once cumulative taxable gifts exceed the exemption, which for most families never happens. The reporting is what tracks the running total.
When Form 709 is required
Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, is due April 15 of the year after the gift, and an extension of your Form 1040 extends it too. You must file one when:
- You gave any one person more than the annual exclusion amount during the year, or gave a future interest of any size.
- You and your spouse elect to split gifts, treating a gift from one of you as made half by each. Splitting requires a return from each spouse even when the split amounts fall under the exclusion.
- You front-loaded a 529 plan with up to five years of exclusions at once, an election that has to be made on the 709.
- You gave an interest in a family business, real estate, or a partnership. A qualified appraisal and adequate disclosure on the return start the three-year statute of limitations. Without adequate disclosure, the IRS can revalue the gift at any time, including at your death.
Forgiving a loan to a child, selling property to a relative below fair market value, and adding a child to a deed as co-owner are gifts too, even though no one wrote a check.
Basis: the piece people forget
A gift carries your basis with it under Section 1015. If you give your son stock you bought for $20,000 that is now worth $100,000, his basis is $20,000, and he pays capital gains tax on the appreciation when he sells. If you hold the same stock until death, it takes a stepped-up basis under Section 1014 and the gain disappears. For appreciated assets, giving cash and keeping the stock is often the better move. For assets you expect to keep growing, moving them out of your estate now can be the better move. The right answer depends on your estate size, the asset, and the recipient's tax bracket.
Keeping the record straight
Every 709 you file builds on the prior ones, because the return asks for all prior taxable gifts. Keep copies permanently, and keep the appraisals behind them. When you die, your executor will need them to prepare Form 706, and your beneficiaries will need them to establish basis.