The Gift Tax Return Trap and How to Avoid it

Even though the gift and tax exemption was increased drastically in 2018 to almost $11.2, it does not mean that a person that does not have a large estate should not file a gift tax return. The annual tax exclusion is $15,000 per beneficiary before it starts to count against a person’s lifetime exemption. The Internal Revenue Service can still impose a penalty for not filing the gift tax return at all, even in the case of not being close to the annual exclusion for a particular year or having an estate valued well below the exemption.

Gifts above the annual gift tax exclusion amount made during the year generally must be reported on Form 709. The gifts might not be taxed, because of the lifetime gift tax exclusion. But the gifts reduce the lifetime exclusion and must be reported so the IRS can track your use of the lifetime exclusion amount. When the gift is a joint gift from a married couple, each spouse must file a tax return to show that they consented to the gift.

How would the IRS know about gifts if a person never files a gift tax return when they made a gift? The agency began clamping down on unfiled gift tax returns by searching for gifts that should have been reported, both during a person’s lifetime and through an audit of an estate after a person’s death.

See Bob Carlson, The Gift Tax Return Trap and How to Avoid it, Forbes, October 23, 2018.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.) for bringing this article to my attention.