Gift Tax Basics Part 2–Concepts for Married Couples
November 28, 2014 - Posted by: admin - In category:
Special gifting rules apply for married couples, most of which are helpful in permitting couples to gift assets to each other and to other individuals while avoiding or minimizing gift taxes.
What special rules apply to married couples?
One of the most important (and helpful) rules is that customary annual gifting limits don’t apply to gifts between spouses. If your spouse is an American citizen, there is no limit on the amount of money and other assets you can give your spouse. For example, Bill Gates can give his wife Melinda $10 billion this year, and another $10 billion next year, with no concern for gift taxes. In that scenario, neither Bill nor Melinda are required to file a gift tax return and the answer is unchanged whether Bill and Melinda file their taxes separately or jointly. However, it is important to note that if your spouse us NOT an American citizen, a different set of rules applies. If your spouse is a non-citizen, you will be required to file a gift tax return if your gifts to your non-citizen spouse exceed a cash value of $145,000 in a given year. Likewise, such gifts over this amount will count against your lifetime exclusion amount and therefore must be reported on such gift tax return.
Gift-splitting is another benefit available to married couples. This means that a husband and wife can combine their annual gifting exclusion amounts to gift up to $28,000 to as many people as they desire each year without needing to use any of their lifetime exclusion amounts. (Note that the 2014 and 2015 annual gift tax threshold is $14,000 per person. This amount is adjusted periodically by the IRS). Normally, this method of gift-splitting does require that each spouse file a gift tax return and consent on the other spouse’s gift tax return to such gift-splitting. Again, gift-splitting is legal and permitted, but it requires the completion of the proper paperwork with the IRS, namely the filing of a Form 709 gift tax return. Another important consideration when it comes to gift-splitting is to make sure that each spouse writes a separate check, even if such check is being drawn from a joint account. The IRS normally considers the person who writes a check to be making the applicable gift–therefore, since gift-splitting is supposed to be the equivalent of each spouse making a portion of the overall gift (normally 1/2 of the gift from each spouse), to properly evidence for the IRS that each spouse is indeed contributing to the overall gift, each spouse should write a separate check.
Can you file a late gift tax return?
The simple answer is yes. To receive an automatic six month extension to file your gift tax return (Form 709), you need to timely file Form 8892. If you are seeking an extension for your personal income tax return, filing a Form 4868 will have the effect of automatically extending the time to file your gift tax return (Form 709) and in this instance, you would not need to also file a Form 8892. Regardless of which approach you are taking, if you are going to owe gift tax, you need to pay such tax by April 15th of the calendar year following the year in which you made such taxable gift in order to avoid interest and penalties being assessed by our friends at the Internal Revenue Service.
But what if you made a taxable gift several years ago and never filed a gift tax return? First, take a deep breath, you are NOT alone–as there are great many people who are in the same boat you are in. When you are in a situation where you were not required to actually pay the gift tax, there is no penalty for filing the gift tax return late. In other words, if you have elected to use a portion of your lifetime exclusion amount to cover such taxable gift, you simply file the overdue gift tax return and inform the IRS that this is what you have elected to do–no harm, no foul. We ALWAYS counsel our clients to comply with applicable laws. Therefore, even if you are late (by several years) in filing your gift tax returns, better late than never!
Is there ever a reason to file a gift tax return even if not required to do so?
This is another GREAT question and the short answer is yes. Sometimes it might make sense to file a gift tax return in order to “start the clock running” for the time period that is given to the IRS to examine and question the value of the gift you are reporting. In other words, if you want to ensure that the IRS is not able to come back to you 20 years down the road and ask questions about some gifts you have made recently, file a gift tax return and then let the applicable statute of limitations run. If you haven’t heard from the IRS in the interim, once the statute of limitations has run, the IRS will no longer be able to come back later and question these gifts (or the value thereof). On the other hand, if you do not file a gift tax return, the statute of limitations does not run. The rationale is that the IRS has a certain period of time to examine and question gifts they have been told about and you “tell them about” these gifts by filing a gift tax return.
As always, we are here to help!