My clients gifted their child a large amount of money. How does that impact their taxes?
During hard times, some individuals may distribute wealth to family members by gifting large amounts of money or property. Taxpayers who gift amounts greater than the annual exclusion are required to file Form 709. As a tax preparer, you need to know that amount and how that compares to the annual exclusion amount. It’s also important to know the changing rules regarding the exemption amount.
In a recent webinar, instructor Larry Zimbler, MST, EA, explains the basic ins and outs of the gift tax and how to prepare Form 709.
Below, you’ll find a few of the top questions from the webinar and their accompanying answers. If you choose to attend the on-demand version of this webinar, you’ll have access to the full recording and the entire list of Q&As.
Q: Please explain “full and adequate consideration.”
A: Generally, full and adequate consideration takes into account what a willing buyer and willing seller would agree to pay for an item [in essense, the fair market value (FMV) of an item]. If a buyer pays an amount under FMV, that below-market portion could be viewed as a gift. For example, parents may sell their home to their child for less than adequate consideration. The difference between the FMV and the amount paid is considered a gift of equity, and a gift tax return would need to be filed for the gift of equity, if greater than the annual exclusion amount.
Q: If a taxpayer contributes to a §529 plan, is that considered a gift, and will Form 709 need to be filed?
A: Yes, a gift to a §529 plan is a completed gift and a gift tax return will need to be filed if an individual contributes more than $16,000 in one year to another individual’s §529 plan. However, taxpayers contributing up to $80,000 ($16,000 x 5) in one year can elect to treat the contribution as if it had been made ratably over five years. This election allows taxpayers to apply the annual exclusion to a portion of the contribution in each of the five years.
Q: If an elderly mother makes her son a co-owner of her savings account, would this be considered a gift? The account balance is over $85,000. Should a gift tax return be prepared since she made him a co-owner of the account?
A: No. This is not considered a completed gift. To be considered a gift, the donor actually needs to give up control on the item. In this case, because the mother is still on the account and has not given up control, Form 709 is not required.
Q: If one spouse gifts a child $50,000, how does gift splitting work?
A: Spouses are able to split gifts between themselves. When doing so, each spouse will file a separate Form 709 for their portion of the gift. Form 709 is never filed jointly; it’s per individual. For example, if Andy and Bonnie are married and Andy gifts their daughter $50,000, the couple can elect to split the gift. Andy and Bonnie will file separate Forms 709, each reporting a gift of $25,000 to their daughter.
To learn more about Form 709 and gifting for tax purposes, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to join our completely free 30-day trial, visit natptax.com/explore.