What you need to know about filing gift and estate tax returns

Have you made substantial gifts of wealth to family members this year? Or are you the executor of the estate of a loved one who died recently? If so, you need to know whether you must file a gift or estate tax return. Let’s take a closer look at the rules.

Filing a gift tax return

Generally, a federal gift tax return (Form 709) is required if you make gifts to or for someone during the year (with certain exceptions, such as gifts to U.S. citizen spouses) that exceed the annual gift tax exclusion ($14,000 for 2017); there’s a separate exclusion for gifts to a noncitizen spouse ($149,000 for 2017).

Also, if you make gifts of future interests, even if they’re less than the annual exclusion amount, a gift tax return is required. Finally, if you split gifts with your spouse, regardless of amount, you must file a gift tax return.

The return is due by April 15 of the year after you make the gift, but the deadline may be extended to October 15. (Dates may be slightly later if the 15th falls on a weekend or holiday.) Being required to file a form doesn’t necessarily mean you owe gift tax. You’ll owe tax only if you’ve already exhausted your lifetime gift and estate tax exemption ($5.49 million for 2017).

In some cases, it’s a good idea to file a gift tax return even if you’re not required to do so. For example, let’s suppose Linda gives $10,000 worth of closely held stock to each of 10 family members, for a total of $100,000. Each gift is within the annual exclusion amount, so she doesn’t file a gift tax return. However, 10 years later, the IRS determines that the value of each gift was actually $20,000 and assesses penalties for failure to file a gift tax return (plus taxes, penalties and interest if the lifetime exemption is exhausted).

Had Linda filed a properly completed gift tax return at the time she made the gifts, it would have triggered the three-year limitations period for auditing her return. Without a return, there’s no time limit on how long the IRS can wait to challenge the valuation of her gifts.

Filing an estate tax return

If required, a federal estate tax return (Form 706) is due nine months after the date of death. Executors can seek an extension of the filing deadline, an extension of the time to pay, or both, by filing Form 4768. Keep in mind that the form provides for an automatic six-month extension of the filing deadline, but that extending the time to pay (up to one year at a time) is at the IRS’s discretion. Executors can file additional requests to extend the filing deadline “for cause” or to obtain additional one-year extensions of time to pay.

Generally, Form 706 is required only if the deceased’s gross estate plus adjusted taxable gifts exceed the exemption. But a return is required even if there’s no estate tax liability after taking all applicable deductions and credits.

Even if an estate tax return isn’t required, executors may need to file one to preserve a surviving spouse’s portability election. Portability allows a surviving spouse to take advantage of a deceased spouse’s unused estate tax exemption amount, but it’s not automatic. To take advantage of portability, the deceased’s executor must make an election on a timely filed estate tax return that computes the unused exemption amount.

Preparing an estate tax return can be a time consuming, costly undertaking, so executors should analyze the relative costs and benefits of a portability election. Generally, filing an estate tax return is advisable only if there’s a reasonable probability that the surviving spouse will exhaust his or her own exemption amount.

Seek professional help

Estate tax rules and regulations can be complicated. If you need help determining whether a gift or estate tax return needs to be filed, contact your tax advisor.

© 2017

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