Taxpayers should consider a host of rules that may nevertheless draw them back into liability-prone situations. They should also consider current circumstances as something that they should take advantage of. Based on current law, present rates and exclusions offer only temporary opportunities that will no longer be available after 2012.
A re-unified estate and gift tax, at a 35% rate and a $5 million applicable exclusion amount, was signed into law by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. However, this change sunsets after 2012 and reverts, unless changed by Congress, to a pre-2001 level of a maximum rate of 55% and a $1 million applicable exclusion.
Various proposals have been made, including abolishing the tax, raising the exclusion amount or, as President Barack Obama has recommended, returning to a 2009 regime that calls for a 45% rate, a $1 million lifetime gift tax exclusion and a $3.5 million applicable exclusion.
The amount of a donor's total taxable gifts in any calendar year is reduced by an amount up to the annual exclusion amount for gifts made to each donee. For calendar year 2011, 2010 and 2009, the inflation-adjusted annual exclusion amount for gifts is $13,000. The annual gift tax exclusion is lost, however, if it is not used by the end of the year. Taxpayers with the wherewithal should therefore consider maximizing the annual exclusion for each family member or other donee in 2011 and again in 2012, since a tightened gift tax after 2012 will not come with any "do-overs" for 2011 or 2012.
Also keep in mind that the annual exclusion is not allowed for gifts of future interests in property. Restrictions on gifts can sometimes unknowingly create such a future interest. Although an interest in property may vest immediately in the donee, it is a future interest if the donee cannot immediately use or enjoy the property.
An unlimited gift tax exclusion exists for a donee's medical care and tuition expenses if paid by the donor directly to a provider or institution. Contributions to qualified state tuition programs and education IRAs, however, do not qualify for this unlimited exclusion. The exclusion is not available for advancements or reimbursements that are paid directly to the donee. All this law must be understood in order to properly file Form 709, irrespective of whether the $5 million exclusion effectively zeros out any immediate gift tax liability.
Gift tax returns on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, must be filed by individuals for gifts exceeding the present $13,000 annual exclusion amount and not otherwise exempt. A delinquency penalty under Code Section 6651 is due for failure to file a return on which a tax is due.
Each spouse must file a separate gift tax return for his or her own individual gifts. However, only the donor spouse need file if:
- Only one spouse made gifts of only present interests totaling twice the annual exclusion amount or less to any individual donee; or,
- Only one spouse made gifts of present interests totaling twice the annual exclusion amount or less to any individual donee, and the consenting spouse made only gifts equal to the annual exclusion amount or less to other donees.
The gift tax return is due together with the donor's income tax return for that year, or by the time permitted by extension for the filing of the donor's income tax return for that calendar year. The IRS may postpone the deadlines in certain disaster areas, and postponements are given to certain military personnel.
For 2010 tax year returns only, the 2010 Tax Relief Act extended the deadline for reporting generation-skipping transfers for nine months, until Sept. 19, 2011. Taxpayers under an automatic six-month extension for their 2010 income tax return until Oct. 17, 2011, therefore, can combine their gift and generation-skipping transfer tax reporting on a single Form 709 filed with their income tax return under the extended date. Alternatively, an amended Form 709 gift tax return may be filed. Also since 2010, every person required to make a gift tax return has also been required to furnish an information statement to each person named in the return.
Notably, post-2012 could be the first time the applicable exclusion will go down. This, in turn, would create the problem of a possible clawback. A clawback might occur when a donor's otherwise taxable gifts during 2011 and 2012 use all or part of the $5 million applicable exclusion over an amount to which the applicable exclusion may revert after 2012.