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Basics of U.S. Gift Taxes in 2017

John J. FureyApril 27, 2017

Taxes

A client recently asked what changed for gift tax returns and estate taxes due to the Tax Cuts and Jobs Act?

Gift Tax Exclusions

  • You need to file a gift tax return for any calendar year in which you give a gift to one person worth more than the annual exclusion amount for that year or your gift does not fit within one of the other exclusions set forth below.
  • In 2018 the annual exclusion changed to $15,000. If you give one person more than $15,000 in 2018, you need to file a gift tax return. In 2017 the annual exclusion amount was $14,000. This change in the annual exclusion amount was due to an inflation adjustment and not because of the Tax Cuts and Jobs Act (Tax Act).
  • The annual exclusion is for an individual taxpayer. If you and your spouse give a gift to one person your joint annual exclusion is $30,000 in 2018.
  • You can give gifts to an unlimited number of individuals and the individuals do not have to be related to you. For example, you can give 10 people each $15,000 for a total of $150,000 and you do not have to file a gift tax return.
  • There are also exclusions for any amounts that you pay directly to a medical institution or an educational institution on behalf of another person. The educational institution does not have to be a post-secondary school. It can be tuition for a private elementary or secondary school. The education exclusion applies only to tuition payments. The payments must be made directly to the medical provider or the education institution.
  • There is no limit and no need to report gifts to your spouse, a charity or a political organization.

Gift Tax Return Filing Requirement (Form 709)

  • You need to file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return if any of the following apply:
    • You gave one person (other than your spouse) a gift or gifts that exceed the annual exclusion for the year.
    • You and your spouse are splitting a gift, even if half of the split gift is less than the annual exclusion. For example, you and your spouse gift an interest in a partnership to your child. Your part of the interest is worth $20,000 and your spouse’s part of the interest is worth $10,000.
    • If you give a person (other than your spouse) a gift of a future interest that the recipient can’t possess or enjoy immediately or from which that person will receive income until a later time.
    • If you give your spouse an interest in property that will terminate due to a future event.
  • The person who makes the gift (donor) must pay if there is any gift tax due. The person who receives the gift (donee) does not owe any taxes because of receiving the gift.

Gift Tax Calculation and Integration with the Estate Tax

  • The Gift Tax rate varies on a graduated basis between 18% and 40% of the value of the gift in excess of any exclusion.
  • The Gift Tax is integrated with the Estate Tax. This means that you are allowed a lifetime exemption from the two taxes that currently varies annually. In 2017 the exemption amount was $5,490,000 for an individual. The Tax Act changed the exemption amount in 2018 to $11,200,000 for an individual. In 2026 the higher exemption amount is scheduled to revert back to the level it was in 2017, adjusted for inflation, unless a future Congress acts to change it.
  • On your Gift Tax Return the annual exemption amount is used to determine a tax credit. This credit represents the maximum amount for which you do not have to pay any Gift or Estate Taxes.
  • In 2017 the credit was $2,141,800. The credit varies every year based on the annual exemption amount. Because of the Tax Act the credit will increase to about $4.3 million in 2018.
  • If 2016 was the first time that you filed a Gift Tax Return and the amount of the tax was $25,000, you reduced your lifetime tax credit by $25,000. You do not have to pay any Gift Tax.
  • If you filed a Gift Tax Return in 2017 and the amount of tax is $20,000, you listed on your 2017 return that you had previously used $25,000 of your credit in 2016. On your 2017 return you report that you have reduced your lifetime tax credit by a total of $45,000.
  • The lifetime exemption and credit amount are set by federal law and are subject to change. For example, in 2009 the lifetime exemption was $1,000,000 and the credit amount was $345,800. See the chart in the Tax Foundation article listed under Sources for the gift tax rates for various years. The gift tax started in 1924.

Gift Tax and Contributions to 529 Plans

  • There is a special rule related to gifts made to 529 plans.
  • If in 2018 you contribute $75,000 to a 529 plan on behalf of one person, you may elect that contribution as if you had made it ratably over a 5-year period.
  • The election allows you to apply the annual exclusion to a portion of the contribution in each of the 5 years bringing the entire $75,000 within the annual exclusion of $15,000 per year.
  • In the first year you make the $75,000 contribution, you must file a Form 709 and elect to use the special rule. If you do not make any gifts for the next 4 years that require a Form 709, you do not have to file a 709 to report the ratable portion of the 529 contribution.

Sources

Instructions for Form 709 

Tax Foundation, Federal Estate and Gift Tax Rates, Exemptions, and Exclusions, 1916-2014 

IRS – Frequently asked Questions on Gift Taxes

IRS – Frequently asked Questions on Estate Taxes