Generally speaking you only need to file a gift tax form when you exceed the annual $11,000 tax-free gift limit. But it's also prudent to send in that Form 709 every time you make a transaction with a family member over $11,000 - even if it wasn't a gift. If you forget, there could be trouble with the IRS down the road. Here's the skinny.
Deadline for Reporting Taxable Gifts
Almost everyone knows about the $11,000 tax-free gift rule, but in case you don't, here's how it works. Each year, you can gift away money or other stuff worth up to $11,000 to a single donee (gift recipient). If you are married, you and your spouse can jointly give away up to $22,000 per donee. You don't have to pay any gift taxes, and your estate tax exemption remains intact.
But what happens when you exceed that limit?
You may have to file a federal gift tax return, using IRS Form 709. It's generally required if you made a gift worth over $11,000 to an individual or several gifts to one individual that add up to more than $11,000. Gifts above the $11,000 annual limit are called "taxable gifts." Don't panic! You won't actually owe any federal gift tax unless your cumulative taxable gifts exceed your $1 million gift tax exemption. But you must still file Form 709 if you made any taxable gifts, even when no tax is due. The deadline is the same as for your 1040.
If you need more time to get Form 709 together, file Form 4868 before your taxes are due. This will extend the deadline for both your 1040 and your 709 to August 15th. Be sure to check the appropriate box in Part II of Form 4868 to let the IRS know you want a Form 709 extension.
If you want to extend your 709 but not your 1040, you must send a letter to the local IRS District Director on the IRS Service Center that handles your returns. Approval is not automatic. In contrast, approval is automatic with Form 4868. So go that route.
Be prepared to pay any income tax you owe along with Form 4868. Ditto if you actually owe any federal gift tax. Otherwise, you'll be charged interest and penalties on the shortfall.
Reporting Deals with Family Members
Did you sell a house, a car or that inherited Chippendale secretary to your children this year? If so, you should consider filing Form 709. Why? Because the IRS can claim transactions between you and family members were actually disguised gifts. This can potentially happen whenever you sell a hard-to-value asset, like real estate or stock in the family business, to a relative.
Say you sold your vacation home to an adult child for $275,000 in 2004. In your opinion, the $275,000 price represented the full market value at the time. The IRS may disagree. After you are dead and gone, the Feds could audit your estate's tax return and claim the home was actually worth $320,000. This would amount to a $45,000 gift to your child ($320,000 - $275,000), which could trigger a bigger estate tax bill for your heirs. Or if you make lots of taxable gifts during your life, you could wind up owing a bigger federal gift tax bill before you die.
Here's how to avoid these problems. Disclose the home sale transaction to the IRS by filing a Form 709 for the 2004 tax year. Assuming your $275,000 valuation is correct (or close), there's no taxable gift. But filing Form 709 means the IRS now has only three years to challenge the home's value. Assuming the three years roll by uneventfully, the IRS can't bring up the issue later when auditing your estate's tax return or a future gift tax return.
You might want to hire a tax pro to make sure you meet the specific Form 709 disclosure rules for any significant non-gift transactions with relatives. Tell your pro to carefully read Regulation 301.6501(c)-1(f)(4) for all the gory details. Unfortunately, this stuff is not common knowledge, even among perfectly competent tax advisors.
As explained earlier, you should extend the Form 709 filing deadline if you need more time.
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