If you’ve made substantial gifts to your loved ones, or if you’re the executor of someone’s estate, it’s important to understand the rules surrounding gift and estate tax returns. Determining whether you need to file a return can be confusing, and in some cases it’s advisable to file a return even if it’s not required. Here’s a brief summary of the rules.
Generally, a federal gift tax return (Form 709) is required if you:
- Make gifts to or for someone during the year (with certain exceptions: for example, gifts to U.S. citizen spouses are excluded) that exceed the annual gift tax exclusion (currently $14,000 in 2017); there’s a separate exclusion for gifts to a noncitizen spouse (currently $149,000 in 2017),
- Make gifts of future interests, even if they’re less than the annual exclusion amount, or
- Split gifts with your spouse, regardless of amount.
The return is due by April 15 of the year after you make the gift, but the deadline may be extended to October 15. Being required to file a form doesn’t necessarily mean you owe gift tax. You’ll owe tax only if you’ve already exhausted your lifetime gift and estate tax exemption (currently, $5.49 million).
In some cases, it’s a good idea to file a gift tax return even if you’re not required to do so. For example, suppose you give $10,000 worth of closely held stock to each of 10 family members, for a total of $100,000. Each gift is within the annual exclusion amount, so you don’t file a gift tax return. However, 10 years later, the IRS determines that the value of each gift was actually $20,000 and assesses penalties for failure to file a gift tax return (plus taxes, penalties and interest if you’ve exhausted your lifetime exemption).
Had you filed a properly completed gift tax return at the time you made the gifts, it would have triggered the three-year limitations period for auditing your return. Without a return, there’s no time limit on how long the IRS can wait to challenge the valuation of your gifts.
If required, a federal estate tax return (Form 706) is due nine months after the date of death. Executors can seek an extension of the filing deadline, an extension of the time to pay, or both, by filing Form 4768. Keep in mind that the form provides for an automatic six-month extension of the filing deadline, but that extending the time to pay (up to one year at a time) is at the IRS’s discretion. Executors can file additional requests to extend the filing deadline “for cause” or to obtain additional one-year extensions of time to pay.
Generally, Form 706 is required only if the deceased’s gross estate plus adjusted taxable gifts exceed the exemption. A return is required even if there’s no estate tax liability after taking all applicable deductions and credits.
Even if an estate tax return isn’t required, executors may need to file one to preserve a surviving spouse’s portability election. Portability allows a surviving spouse to take advantage of a deceased spouse’s unused estate tax exemption amount, but it’s not automatic. To take advantage of portability, the deceased’s executor must make an election on a timely filed estate tax return that computes the unused exemption amount.
Preparing an estate tax return can be a time consuming, costly undertaking, so executors should analyze the relative costs and benefits of a portability election. Generally, filing an estate tax return is advisable only if there’s a reasonable probability that the surviving spouse will exhaust his or her own exemption amount.
Handle with care
Determining whether a gift or estate tax return is necessary or desirable can be complicated. Contact us at (949) 482-1850 or here to discuss your options.