Here’s one that not many of us frequently have reason to use. Form 709 is used to report transfers subject to federal gift taxes and generation skipping transfer (GST) taxes. It’s also used to allocate the lifetime GST exemption to property transferred during the transferor’s lifetime.
First things first, you need to determine whether or not you need to file. Generally, if you are a citizen of the United States, you need not file a gift return if you made no gifts during the year to your spouse, you did not give more than $13,000 to any one donee, and all the gifts you made were of present interests.
If the only gifts you made during the year were to tax-deductible charities, you need not file a gift return, as long as you transferred your entire interest in the gift to the charity. On the other hand, if you are required to file because you made non-charitable gifts, then you must include all of your charitable gifts on your Form 709.
What’s subject to the gift tax?
Generally, the federal gift tax applies to any transfer made to a donee, be it directly, indirectly, by trust or any other means.
The tax applies not just to gratuitous transfers (those for which nothing is received in return); it also applies to those in which the value of something received is less than what is given. This only applies when the transfer does not occur in the normal course of business. The gift tax may also apply to the forgiveness of debt, as well as changes in loan terms that result in no-interest payment schedules, or rates below market rate.
Certain types of payments are entirely excluded from the gift tax. These include transfers to political organizations, payments that qualify for the educational exclusion, and payments that qualify for the medical exclusion.
“Political organization,” in this context, means any organization that has received 527 status. The educational exemption excludes from the gift tax any amount paid on behalf of someone to a qualified educational institution, defined as one that maintains a faculty and curriculum. To qualify for exemption, the amount paid must be for tuition. Likewise, the medical exemption excludes any amount paid on behalf of someone to a medical institution that provided them care.
If you are confused by any of this, you are not alone. And worse, this is only the beginning.
The tax-filing situation for a Form 709 never gets simpler. For example, you and your spouse can never file joint gift return. Both are responsible for their own returns. If you and your spouse transfer a piece of community property, you are both responsible for a Form 709 gift return for half of the total gift amount.
The filing process gets even more complicated for anyone involved in a joint tenancy of property. For instance, if you have established a joint bank account and can withdraw your interest at any time, you have made a gift to the donee once they withdraw funds from the account on his or her own behalf.
Because of the complexity of these situations, it’s best to consult a tax professional. More, it’s best to consult one before the transfer. A tax professional will help you figure out how to transfer the assets in question while simultaneously minimizing your tax liability. Further, if tax is due on your gift and you don’t pay it, your donee will probably have to. For this reason it’s best not to leave anything to chance.