Going over gift tax limits

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markcoop
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Going over gift tax limits

Post by markcoop » Tue Mar 24, 2015 10:06 am

It seems alot of effort is made to not go over the annual federal gift tax exclusion (currently $14K). Assuming one is not close to having an estate large enough for estate taxes (currently $5.34 million), is it really a big deal to file a gift tax return? I haven't played around in Turbotax for this yet, but I imagine it would be trivial to do. Since it won't affect estate taxes (because estate not large enough), it seems like this is just answering a few question in Turbotax.

How about when you go over the annual limit by a small amount (say, an extra $100 made by a parent to a child for a birthday gift). What would be the consequence of not filling out the gift tax return? I'm not asking a question about how to cheat on taxes here, but rather what would happen in such a situation. Since no taxes would be actually do now or in the future (I understand that future is not known), what could any penalty be?

Thanks for any input
Mark

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dodecahedron
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Re: Going over gift tax limits

Post by dodecahedron » Tue Mar 24, 2015 10:21 am

TurboTax does income tax returns, not gift tax returns.

The gift tax (Form 709) and estate tax (Form 706) are not income taxes. TurboTax doesn't do those forms. I would be surprised if any of the major retail consumer income tax software programs (i.e., HRBlock, TaxAct, etc.) do those forms.

Professionals (e.g., CPAs and attorneys) do have software that will complete those forms, but the cost for an individual consumer to purchase that specialized software would be prohibitive.

Fortunately, the gift tax form isn't all that complicated to do yourself (unless there is also generation-skipping involved, in which case you may want to consult a tax pro.)

According to this article, written by four prominent tax law professors/scholars, under current law, "The penalty structure [for unfiled gift tax returns] is toothless and rarely applies," because the penalty is proportional to the amount of unpaid tax.
http://scholarship.law.duke.edu/cgi/vie ... cholarship

Still, filing a gift tax return is legally required under current law, so, as a law-abiding person, I would do it if I had to do so. I prefer to arrange my life in a way that does not require filing gift tax returns. Any gift tax return I file during my life could complicate (and therefore make more expensive) any federal and/or state estate tax returns my heirs may have to file. My preference is to keep their lives after my death simple and minimize any paperwork complications.
Last edited by dodecahedron on Tue Mar 24, 2015 10:51 am, edited 1 time in total.

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dodecahedron
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Re: Going over gift tax limits

Post by dodecahedron » Tue Mar 24, 2015 10:40 am

Ways to legally avoid filing gift tax returns:

1) Keep gifts under $14K per recipient per donor per year (note that this means a husband and wife can give up to $56K to their daughter and son-in-law each year.)

2) Payments made directly to educational and/or medical providers for tuition and medical expenses do not count against that $14K per year
Last edited by dodecahedron on Tue Mar 24, 2015 10:59 am, edited 1 time in total.

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dodecahedron
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Re: Going over gift tax limits

Post by dodecahedron » Tue Mar 24, 2015 10:51 am

Also, some states may have gift tax laws, which can change and interact with estate tax laws in mysterious and inscrutable ways. New York is a poster child for this. NY used to have no gift tax but a substantial estate tax that kicked in at $1,000,000, well below the federal limit in recent years. This created some incentives for gifts. However, NY is now gradually raising the estate tax limit to align with the federal limit but some lifetime gifts made during the transition period might wind up being taxable if you die before the transition is complete.

http://wealthmanagement.com/wealth-plan ... ax-regimes

TTBG
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Re: Going over gift tax limits

Post by TTBG » Tue Mar 24, 2015 10:56 am

markcoop wrote:It seems alot of effort is made to not go over the annual federal gift tax exclusion (currently $14K). Assuming one is not close to having an estate large enough for estate taxes (currently $5.34 million), is it really a big deal to file a gift tax return?
Thanks for asking this question; I am also very confused by this -- why is there so much emphasis on staying below the $14K limit to avoid having to file a gift tax return? If a person's estate is below the $5.34 million, isn't it just filing some paperwork with no extra tax due?

Steady59
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Re: Going over gift tax limits

Post by Steady59 » Tue Mar 24, 2015 11:01 am

Extending the questions further...

What happens if the benefactor gifts beyond the annual limit to a child/beneficiary in a given year?

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dodecahedron
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Re: Going over gift tax limits

Post by dodecahedron » Tue Mar 24, 2015 11:25 am

TTBG wrote:
markcoop wrote:It seems alot of effort is made to not go over the annual federal gift tax exclusion (currently $14K). Assuming one is not close to having an estate large enough for estate taxes (currently $5.34 million), is it really a big deal to file a gift tax return?
Thanks for asking this question; I am also very confused by this -- why is there so much emphasis on staying below the $14K limit to avoid having to file a gift tax return? If a person's estate is below the $5.34 million, isn't it just filing some paperwork with no extra tax due?
Paperwork with no tax due can sometimes be expensive if you feel the need to engage a tax pro to do it correctly. I paid a significant amount of money to my attorney's office for the preparation of federal and state estate tax returns (hundreds of pages of filings) on my late husband's estate even though there was zero tax liability for either federal or state (since an unlimited amount can be left to a spouse estate tax free).

Afty
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Re: Going over gift tax limits

Post by Afty » Tue Mar 24, 2015 11:35 am

Honestly, I think many people misunderstand the tax implications and believe that they will have to pay gift tax on anything over $14k. I know I did until I started reading Bogleheads. I suspect that's the source of all the concern about not exceeding the annual exclusion.

Steady59
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Re: Going over gift tax limits

Post by Steady59 » Tue Mar 24, 2015 2:17 pm

My understanding (and correct me if I am wrong) is that if you exceed the $14K gift limit to someone, you have to file some form such that your overall estate limit exclusion at your death will be reduced from $5.34M (or whatever it is at the time) by the amount of the excess gift. Your beneficiaries are not directly taxed.

markcoop
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Re: Going over gift tax limits

Post by markcoop » Tue Mar 24, 2015 2:25 pm

Thanks for the replies.

For some reason I just assumed it would be just another form on your yearly taxes and not a separate return. I guess I never saw a question for it in the past, so it's not surprising that it would not be in Turbotax at all. So, I guess it is a little bit of deal. You can pay someone to do it, or fill it out by hand. Having quickly looked at the form, still don't think it's a huge deal.

Does anyone have an opinion about what is the worst case scenario if you are over the limit by a little bit (the example I gave above is a parent gifts an extra $100 for a birthday gift). I imagine this happens all the time. Someone wants to gift every year and therefore writes a check on Jan 1. Any other money given would not be covered by the exclusion.
Mark

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dodecahedron
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Re: Going over gift tax limits

Post by dodecahedron » Tue Mar 24, 2015 2:26 pm

Steady59 wrote:My understanding (and correct me if I am wrong) is that if you exceed the $14K gift limit to someone, you have to file some form such that your overall estate limit exclusion at your death will be reduced from $5.34M (or whatever it is at the time) by the amount of the excess gift. Your beneficiaries are not directly taxed.
That is basically correct at the federal level. However, the consequences of lifetime gifts beyond $14K per year per recipient can have state tax implications for estates considerably smaller than the $5+M federal exclusion in some states. Here is a summary of the applicable state laws, updated last year. (They have been in some flux as states have adapted at different rates and in different ways to the federal estate/gift tax changes. Except for Connecticut, these state laws primarily apply only if you have the misfortune to die within a few years of making the gift.)

http://www.house.leg.state.mn.us/hrd/pu ... tesurv.pdf

curmudgeon
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Re: Going over gift tax limits

Post by curmudgeon » Tue Mar 24, 2015 3:49 pm

I don't know that I would go to "a lot" of effort to avoid needing to file a gift tax return, but I would definitely go to some effort to avoid it, just on principle. I don't like leaving paper trails around that could potentially come back to bite myself or my heirs *if* there is an easy way to avoid it.

A similar example is that I don't use DRIP (dividend reinvestment) in taxable accounts because of the hassle in tracking cost basis. Every additional piece of tax detail has real costs in terms of complexity (now or future) even if it doesn't directly have a dollar cost in taxes.

mptfan
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Re: Going over gift tax limits

Post by mptfan » Tue Mar 24, 2015 3:58 pm

Afty wrote:Honestly, I think many people misunderstand the tax implications and believe that they will have to pay gift tax on anything over $14k. I know I did until I started reading Bogleheads. I suspect that's the source of all the concern about not exceeding the annual exclusion.
This.

dbr
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Re: Going over gift tax limits

Post by dbr » Tue Mar 24, 2015 4:21 pm

mptfan wrote:
Afty wrote:Honestly, I think many people misunderstand the tax implications and believe that they will have to pay gift tax on anything over $14k. I know I did until I started reading Bogleheads. I suspect that's the source of all the concern about not exceeding the annual exclusion.
This.
I agree that is the main reason this is brought up so often. However, another downside is that this gift/estate tax thing is a lifetime running tally that you now have to keep all the records for. Of course, in that respect it is not different from cost basis/capital gains or IRA contributions, but still if one can not have it that might be better than having it.

john94549
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Re: Going over gift tax limits

Post by john94549 » Wed Mar 25, 2015 9:49 am

It really takes some effort (and considerable wealth) to exceed the lifetime exclusion. I doubt that hunting down non-filers among those who gift modestly above the threshold is high on the IRS's priorities. I suspect the IRS has a fair idea of the extremely tiny percent of the mega-rich who should be filing, and, as a result, those folks probably do.

markcoop
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Re: Going over gift tax limits

Post by markcoop » Wed Mar 25, 2015 10:54 am

I have another question. If a parent wants to gift to her married child, I know she can gift $14K to the child and $14K to the spouse of the child. Does it need to be two separate gifts. For example, can the parent write a check for $28K made out to their child and the child just deposits the check in a joint checking account. Is that ok?
Mark

curmudgeon
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Re: Going over gift tax limits

Post by curmudgeon » Wed Mar 25, 2015 11:55 am

markcoop wrote:I have another question. If a parent wants to gift to her married child, I know she can gift $14K to the child and $14K to the spouse of the child. Does it need to be two separate gifts. For example, can the parent write a check for $28K made out to their child and the child just deposits the check in a joint checking account. Is that ok?
One check doesn't pass the sniff test to me. Not that the IRS is ever likely to come after you to hassle you, but it's hard to defend something as being a "gift" to one person when the check is written to someone else. Two checks may come from the same account (of the giver) and end up going to the same account (joint account of receivers), but that makes it clear that these are two separate gifts and are divisible at the option of the receivers.

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ivyhedge
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Re: Going over gift tax limits

Post by ivyhedge » Wed Mar 25, 2015 12:24 pm

curmudgeon wrote:
markcoop wrote:I have another question. If a parent wants to gift to her married child, I know she can gift $14K to the child and $14K to the spouse of the child. Does it need to be two separate gifts. For example, can the parent write a check for $28K made out to their child and the child just deposits the check in a joint checking account. Is that ok?
One check doesn't pass the sniff test to me. Not that the IRS is ever likely to come after you to hassle you, but it's hard to defend something as being a "gift" to one person when the check is written to someone else. Two checks may come from the same account (of the giver) and end up going to the same account (joint account of receivers), but that makes it clear that these are two separate gifts and are divisible at the option of the receivers.
^ Correct. Keep things simple by making sure that checks are to one person from one person. For example, married relatives can give a doubly to a family of four since each spouse can name each of the four family members as the recipient: that's $0.112 million. Checks deposited into mutually held accounts are clear (since the intent is encoded on the check's "to" line). Checks from a mutual account are more confounding, since the spirit might be "from an individual", but is actually from "an entity", which is singular.
Polymath.

markcoop
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Re: Going over gift tax limits

Post by markcoop » Wed Mar 25, 2015 5:00 pm

Let me slightly rephrase the question. Assuming a check was already cut for greater than $14K to one individual but the intention was to spread to gift among two married people, has the annual federal gift tax exclusion been exceeded (and therefore a gift tax return is needed)?

I understand it is desirable to keep things clean, but we've passed that point already.
Mark

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loves2read
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Re: Going over gift tax limits

Post by loves2read » Wed Mar 25, 2015 9:38 pm

markcoop wrote:I have another question. If a parent wants to gift to her married child, I know she can gift $14K to the child and $14K to the spouse of the child. Does it need to be two separate gifts. For example, can the parent write a check for $28K made out to their child and the child just deposits the check in a joint checking account. Is that ok?
We gift our son and daughter and their spouses--one check per person from our joint accounts--and have done it like that past 3 years. The first year we only gifted out children. Our CPA said using one check/joint account for the 28K was pretty much self-explanatory.
Last year we gifted our grandson in a 529 account.

curmudgeon
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Re: Going over gift tax limits

Post by curmudgeon » Wed Mar 25, 2015 9:56 pm

markcoop wrote:Let me slightly rephrase the question. Assuming a check was already cut for greater than $14K to one individual but the intention was to spread to gift among two married people, has the annual federal gift tax exclusion been exceeded (and therefore a gift tax return is needed)?

I understand it is desirable to keep things clean, but we've passed that point already.
In that case, I'd probably write up a note describing the circumstance and intent (just two or three lines), and keep it with my tax files for this year. Don't try to send it to the IRS, just keep it with your supporting documentation.

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