Are you planning to give gifts to family members in 2021? As long as the gifts do not exceed the limits for the annual gift tax exclusion, you have no federal gift tax worries. Generally, you do not even have to file a gift tax return.
However, there are times when you DO have to file a gift tax return, Form 709, for 2021, and other times when you may choose to file a return even if you are not technically required to.
Background: Under the annual gift tax exclusion, gifts up to a specified limit are completely exempted from federal gift tax, without eroding any of the unified estate and gift tax exemption. The annual gift tax exclusion for 2021 is $15,000 per recipient (the same as 2020). Unlike most other inflation-based adjustments, the exclusion may increase only in $1,000 increments.
For instance, if you gave five family members $15,000 each in 2021, for a total of $75,000, you would owe zero gift tax. What’s more, the exclusion is doubled to $30,000 per recipient if your spouse consents to join in the gift. However, in the case of this “split gift,” you must file a gift tax return (unless you reside in a community property state).
The unified estate and gift tax exemption, which applies to both lifetime gifts and amounts in your taxable estate, can pick up the slack if your gifts exceed the annual gift tax exclusion amount. However, this erodes the exemption that can subsequently be used to shelter your assets from estate tax. The exemption effectively shelters $11.7 million from tax in 2021.
If you are required to file a gift tax return, it is generally due by April 15th of the following tax year, just like your federal income tax return. For instance, for gifts above the exclusion or split gifts made in 2021, the deadline for the gift tax return is April 15, 2022. If you apply for an extension for your federal income tax return filing, the extension applies to your gift tax return. Thus, you may be able to postpone filing until October 17, 2022. (October 15, 2022 is a Saturday.)
Note that you may file a gift tax return, even if you are not required to, for purposes of establishing the value of assets with the IRS. This may also provide a measure of audit protection. The IRS frequently audits estates if it suspects that assets have been undervalued. By filing a gift tax return where you honestly disclose the value of the gifts, a safe harbor rule prohibits audits after three years has passed. But this safe-harbor rule does not apply in the event of fraud or inadequate disclosure.
Final words: This is usually not a do-it-yourself proposition. Rely on your JMF professional tax advisors to avoid any dire tax consequences.