Normally, we don’t advise readers to add to the paperwork required by the IRS. But there are exceptions.
Strategy: File the federal gift tax return form, Form 709, if you make gifts this year—even if you don’t have to. This provides some protection if the IRS comes digging for dirt later on.
Frequently, the extra work will be worth it.
Here’s the whole story: You must file Form 709 by April 15 of the following year if your total gifts for the year exceed the annual gift tax exclusion. For the 2017 tax year, the exclusion is $14,000 per recipient (projected to increase to $15,000 in 2018).
If you and your spouse make a joint gift, the exclusion is doubled to $28,000. Generally, you’re required to file a gift tax return for joint gifts, but if you live in a community property state you don’t have to file a return for gifts up to the $28,000 limit.
Of course, you can avoid paying gift tax on excess gifts through your lifetime gift-tax exclusion of $5.49 million in 2017. But using part of the exemption erodes your estate tax shelter for other assets. Depending on your situation, you may want to avoid this result.
In the past, some taxpayers may have understated the value of lifetime gifts. That meant the IRS could audit their estates and reassess the values, so any “little white lies” could haunt family members for years after their death.
But now a safe-harbor rule protects taxpayers. If you honestly disclose your gifts on Form 709, the IRS can’t audit your return after three years have passed. Even better, the IRS is barred from revisiting the issue in a subsequent audit of your estate. The stated value of the gifts is preserved for eternity.
Tip: The safe-harbor rule doesn’t apply in the case of fraud or inadequate disclosure.
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