Deborah L. Jacobs for Forbes writes: In the countdown to April 15, many people rushing to prepare their
individual income tax returns will overlook another key tax document
that’s due the same day: Form 709, covering taxable (or potentially
taxable) gifts made during the previous year. Tax pros estimate that
there are more than twice as many people in this category for
the current filing season (covering 2012) than for the previous one.
This is one more thing to blame on the year-end fiscal cliff
frenzy. Unless you were living under a rock or have already repressed
the details, you probably recall that the $5.12 million per-person
exclusion from the federal estate and gift tax had been scheduled to
automatically dip to $1 million on Jan. 1, with the tax on transfers
above that amount rising from 35% to up to 55%.
At the urging of their financial advisors, greedy descendants or golf
buddies, some wealthy folks rushed to make lifetime gifts that would
pare down their estates, ruining the holiday season for their lawyers
and tax advisers.
As their clients jetted off to ski chalets and beachfront properties,
lawyers left to do the paperwork felt like Cinderella. Mostly their
chores involved setting up trusts and funding them with the full $5.12
million per-person ($10.24 million for married couples) exemption.
The story had a happy ending at the dawn of 2013, when Congress made
permanent the system that was in effect before anyone heard of the fiscal cliff, and raising the top tax rate to 40%. To cap it off, on Jan. 11 the IRS announced that, with an inflation adjustment, the estate tax exclusion amount for deaths in 2013 would be $5.25 million.
But now the lawyers have one more reason to be busy: You must report
2012 gifts on Form 709 even if you don’t owe tax. Among other things,
that’s so the IRS will know how much of the $5.12 million ($5.25 million
for 2013) tax-free amount you have used so far.
Do-it-yourself types can download the form as a fillable PDF plus the instructions that go with it from the IRS web site.
But if you made the kind of gifts that were getting all the attention
late last year, you will probably delegate this job to your tax adviser.
Based on the volume of work late last year, lawyers meeting in January
in Orlando at the Heckerling Institute on Estate Planning — the annual Super Bowl
on the subject — were predicting that there would be twice as many gift
tax returns filed for the 2012 tax year as for the previous one.
Overworked IRS?
It will be interesting to see whether statistics bear out their
forecasts. For the 2011 tax year, there were 219,544 gift tax returns
filed, according to IRS statistics which download here as
a PDF. However, very few of them — about 3,000 – involved gifts of $1
million or more. Most related instead to using what’s called the annual
exclusion. This is the amount that you are allowed to give, in cash,
property or gifts, to as many people as you want each year without
dipping into your lifetime exemption amount. Last year the annual
exclusion was $13,000. The annual exclusion for 2013 is $14,000.
There are various reasons why you might need to report these
relatively small (in the scheme of things) gifts. To come within the
annual exclusion, a gift must be a present interest, meaning that the
recipient can use the gift immediately. That’s certainly true with cash,
but can be a different story with gifts to trusts, in which
beneficiaries don’t have any rights until later. Any time you make a
gift that isn’t a present interest, it must be reported, no matter how
small the amount.
A popular use of the annual exclusion is to put money in Section 529
college savings plans, setting up a separate account for each family
member you want to benefit.
The law also permits lump-sum deposits of as much as five times the
annual exclusion (which this year is $70,000 for individuals or
$140,000 for married couples), per person at once but in that case you
must file a gift-tax return electing to treat the gift as if it had been
spread over five years. During this five-year period, you cannot make
additional annual exclusion gifts to the beneficiary of the 529 plan. If
you die before the five-year period is up, part of the gift, reflecting
the number of years still to go on your five-year gift, will be
included as part of your estate.
Spousal advantage
Special rules also apply when spouses combine their gifts. It’s
called gift-splitting. By using the annual exclusion this way they can
jointly give away up to $28,000 this year to as many people as they want
without dipping into the $5.25 million lifetime allotment. Ordinarily
couples must then file a gift tax return and consent, on each others’
returns, to gift-split.
It’s also possible for spouses to share their $5.25 million lifetime
exclusion amount. (Here too, they must file a gift-tax return and
consent to gift-split.) But keep in mind that this reduces the amount
available to each of them to make tax-free transfers at death to someone
other than each other–for example to children. And when the first
spouse dies, there will be less unused exclusion left for the survivor
to carry over through portability
Timing is everything
So let’s say you need to file a gift tax return for 2012 — either for
one of these run-of-the-mill reasons, or because you used all or part
of your life time exclusion amount. Should you get an extension to file
Form 709?
Getting one is easy enough. To request an automatic six-month
extension, you can file Form 8892. If you are applying for an extension
for your personal income taxes, filing the necessary paperwork for that
(Form 4868) automatically extends your time to file Form 709, so you
don’t need to request the extension separately. Either way, though, if
you owe tax, you must pay it by April 15 (use the voucher on the Form
8892 for this) or you will owe interest and perhaps penalties.
But there’s a strategic reason for filing on time – especially this
year. If the lawyers are right that there’s a deluge of gift tax returns
coming, the 350 or so tax examiners typically assigned to this task
will have that much less time to scrutinize your return. And if there’s
any room for quibbling about the value you’ve attached to your gift,
that could be a good thing.
As usual, the sooner you file, the sooner you start the statute of
limitations running on your gift tax return. Under the tax law and
Internal Revenue Service regulations, to start the statute of
limitations running on your gift tax return, you must make “adequate
disclosure” of the gift. The only way to do that is to file a gift tax
return reporting the gift. So even if you’re not required to file a
return, you might want to do it anyway if there’s room for debate about
what your gift is worth.
Odds of an audit
Like other tax returns, gift tax returns get audited and filing one
(even just to start the statute of limitations running) means you might
get audited. However, when you make a transfer that’s clearly a taxable
gift, the law requires you to report it. Plus, after you die, during an
estate tax audit, the IRS can question–and tax–gifts you made many years
earlier if you didn’t file a return reporting them.
If you didn’t file gift tax returns for past tax years, it’s not too
late to correct the situation. Generally speaking you have until the IRS
catches the problem. When you’re not liable for gift tax, there’s no
penalty for late filing.
Since the $5.25 million lifetime exclusion from gift tax and any gift
tax you pay are cumulative, you must keep the returns indefinitely.
Your heirs need them to calculate the tax, if any, on your estate. And
the most likely time for the IRS to flag unreported gifts or to question
the value of the gifts you made is after you die. You do everyone a
favor by leaving all the documentation behind.
Saturday, March 23, 2013
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The Government, and governments, (all parties) have backed-off on the income tax and switched to a revenue system based on employment taxes, sales taxes, fines, and 2013 tax brackets. If you look at the big picture, both parties want more of your money. Who knows, maybe they deserve it.
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