The end of January is always an important period in the life of the United States, as the tax filing season begins (this year on January 26). Therefore, in the coming period, let us familiarize ourselves with the details of certain key types of taxes. Gift transfers form part of the wealth transfer taxation system. The regulation focuses on determining when a given transfer of property qualifies as a gift, under what conditions it is exempt from taxation, when a filing obligation arises, and how the gift tax fits into the so-called unified transfer tax system together with the estate tax.
We will examine the details of the estate tax in a separate article. Before delving into the technical aspects, let us review some basic concepts that are essential for easier understanding.
Gift tax as a “wealth transfer tax” and the unified system
In the United States, gift tax is a tax applicable to transfers of property made during a person’s lifetime (wealth transfer tax). The essence of the system is that gift tax and estate tax form part of a unified transfer tax system: if someone transfers property gratuitously, it may have tax relevance either during the person’s lifetime or upon death. The subject of the gift may be real or personal property, tangible or intangible assets. In the next article, we will examine how these two types of taxes are interconnected, as gift tax has relevance in the calculation of the estate tax.
Is the tax borne by the donor or the donee?
The gift tax taxes the transfer itself and is borne by the donor, not by the recipient (donee).
When must a gift tax return be filed?
Generally, the donor is required to file Form 709 (gift tax return), unless the gift(s) made during the given year are fully exempt under one of the following:
- annual exclusion – USD 18,000 per donee per year (2024),
- deduction for qualified charitable gifts,
- deduction for qualified transfers made to a spouse.
These exemptions/deductions apply only to so-called present interest gifts.
The difference between present interest and future interest
In the case of a present interest, the recipient receives an immediate and unconditional right to the possession, use, or enjoyment of the property, or to the income derived from the property. In contrast, in the case of a future interest, the entitlement arises later or is subject to a condition.
In the case of a future interest, filing Form 709 is mandatory, and the annual USD 18,000 exclusion does not apply.
When is a gift considered “complete”?
A gift is considered complete when the donor transfers the property in such a way that it is removed from the donor’s dominion and control, and the donor no longer has any legal ability to change the disposition of the property.
Deadline for filing the return
Generally, the filing deadline is April 15 of the year following the year in which the gift was made. A gift tax return for the year of death may be filed no later than the due date of the estate tax return. If the taxpayer receives an extension for filing their personal income tax return, this extension automatically applies to Form 709 for the same (extended) deadline.
The marital exclusion
Generally, no filing is required for gifts made to a spouse. However, this relief does not apply if:
- the spouse is not a U.S. citizen, and the total value of the gifts exceeds USD 185,000 (2024); or
- the gift is a terminable interest and does not meet the requirements of the power of appointment exception.
Terminable interest: a property interest that terminates over time or is subject to conditions and does not remain permanently with the spouse (e.g. the spouse may use the property only for life; may not freely dispose of it; or the property automatically passes to another person upon the spouse’s death).
So-called charitable gifts – when is no return required?
If the taxpayer makes only gifts during the year that are deductible as qualified charitable gifts, Form 709 is not required. However, if only a partial interest is transferred, the return must be filed.
So-called gift splitting: spousal splitting
If the spouse’s consent, gifts made to third persons may be split (a gift made by one spouse is treated as having been made one-half by each spouse). However:
- this is not permitted if the spouses were not married at the time of the gift,
- it is excluded in certain divorce/remarriage combinations,
- it is excluded if one of the spouses is a nonresident alien,
- there is no joint gift tax return: each spouse must file a separate return (according to the rules, consent is often given by signature, subject to specific exceptions),
- if elected, all gifts made by both spouses to third persons must be split,
- and joint and several liability applies.
Example
In 2024, the taxpayer made the following transfers of property:
- USD 20,000: donation to the United Way
- USD 18,000: contribution to a political organization
- USD 24,000: tuition paid directly to the taxpayer’s nephew’s college
- USD 19,000: tuition paid directly to the taxpayer’s niece
What amount of gifts must be reported on the taxpayer’s 2024 Form 709 gift tax return?
Correct answer: the total amount of gifts to be reported is USD 39,000.
Explanation: If the taxpayer is required to file a gift tax return (Form 709) due to non-charitable gifts, then charitable gifts must also be included in the return. However, the following do not qualify as gifts and therefore are not included in the total amount of reportable gifts:
- tuition paid directly to an educational institution (therefore, the USD 24,000 is not included), and
- contributions made to a political organization (therefore, the USD 18,000 is not included).
Accordingly, the taxpayer must include only:
- the USD 20,000 charitable donation, and
- the USD 19,000 tuition paid directly to a private individual (since it was not paid directly to the educational institution; had it been paid directly; it would not be included)
in the return.