Gift Tax (Form 709)

The federal gift tax is a transfer tax imposed on the transfer of property from one person to another while receiving nothing, or less than full value, in return. The gift tax works in tandem with the estate tax (they share a unified lifetime exemption) to prevent taxpayers from avoiding estate taxes by simply giving away their assets during their lifetime.

What Constitutes a Gift?

A gift is any transfer of property (including money) where the donor receives nothing, or less than full fair market value, in return. The gift tax applies to the transfer of property, not the property itself.

Key Elements of a Taxable Gift:

• Transfer of property or property rights
• Donor receives less than adequate and full consideration
• Transfer is completed (donor relinquishes dominion and control)
• Donee accepts the gift

Examples of Taxable Gifts:

• Giving cash to a family member
• Transferring stock to a child
• Adding a child's name to a deed (gift of property interest)
• Selling property to a relative for less than fair market value (gift of the difference)
• Forgiving a debt owed by a family member
• Making interest-free or below-market loans (imputed interest may be treated as a gift)

2024 Gift Tax Exclusions and Exemptions

Annual Gift Tax Exclusion

The annual exclusion allows donors to give up to $18,000 per donee in 2024 without filing a gift tax return or using any lifetime exemption. This exclusion applies separately to each recipient.

Example: Sarah can give $18,000 to each of her three children ($54,000 total) without any gift tax consequences or filing requirements.

Gift Splitting: Married couples can elect to "split" gifts, treating each gift as if half came from each spouse. This effectively doubles the annual exclusion to $36,000 per donee when both spouses consent.

Important: Gift splitting requires filing Form 709 for both spouses, even if no gift tax is owed. Both spouses must consent to split all gifts made during the year.

Example: Tom gives his daughter $30,000 in 2024. If Tom and his wife Mary elect gift splitting, each is treated as giving $15,000. Since $15,000 is below the $18,000 annual exclusion, no gift tax applies. However, both Tom and Mary must file Form 709 to document the gift splitting election.

Unlimited Exclusions (Not Subject to Gift Tax)

Certain transfers are completely excluded from gift tax, regardless of amount:

Critical Distinction: Tuition and medical payments must be made directly to the institution or provider. If you give money to someone to pay their own tuition or medical bills, that is a taxable gift subject to the annual exclusion rules.

Example - Taxable vs. Non-Taxable:

• Grandma pays $80,000 directly to State University for grandson's tuition = Not a taxable gift
• Grandma gives grandson $80,000 to pay his tuition = Taxable gift (only $18,000 excluded)

Gifts to Non-Citizen Spouses

The unlimited marital deduction does not apply to gifts to a spouse who is not a U.S. citizen. Instead, a special increased annual exclusion of $185,000 applies for 2024.

Example: John, a U.S. citizen, wants to give property worth $200,000 to his wife Maria, who is a legal permanent resident (green card holder) but not a U.S. citizen. Of the $200,000:

• $185,000 is excluded under the non-citizen spouse rule
• $15,000 is a taxable gift (uses lifetime exemption or incurs tax)

Present Interest vs. Future Interest Gifts

The annual exclusion only applies to present interest gifts. A present interest is an unrestricted right to the immediate use, possession, or enjoyment of property.

Future Interest Examples:

• Remainder interests
• Reversionary interests
• Gifts with restrictions on access

Crummey Powers: Converting Future Interests to Present Interests

A Crummey power (named after the 1968 Tax Court case Crummey v. Commissioner) is a trust provision that gives beneficiaries a limited right to withdraw contributions made to the trust, typically for 30-60 days.

How It Works:

1. Donor contributes to an irrevocable trust
2. Beneficiaries receive written notice of their withdrawal right
3. Beneficiaries have a limited time (usually 30-60 days) to withdraw their share
4. If not withdrawn, funds remain in trust

Tax Result: Because beneficiaries have the immediate right to withdraw (even if they don't exercise it), the gift qualifies as a present interest eligible for the annual exclusion.

IRS Requirements for Valid Crummey Powers:

• Beneficiaries must have actual notice of the withdrawal right
• Sufficient time to exercise the right (typically 30+ days)
• No agreement or understanding that the power won't be exercised
• Beneficiaries should have some other interest in the trust (not just "naked" Crummey powers)

Lifetime Gift and Estate Tax Exemption

The gift tax and estate tax share a unified lifetime exemption of $13.61 million for 2024. Any taxable gifts exceeding the annual exclusion reduce this lifetime exemption.

How It Works:

1. Annual exclusion shields the first $18,000 per donee
2. Amounts above the annual exclusion are "taxable gifts"
3. Taxable gifts reduce the available lifetime exemption
4. Gift tax is owed only when the lifetime exemption is exhausted
5. Any remaining exemption carries over to the estate at death

Example: In 2024, David gives his son $118,000.

• $18,000 is covered by the annual exclusion (no tax consequence)
• $100,000 is a taxable gift reported on Form 709
• David's lifetime exemption is reduced from $13.61 million to $13.51 million
• No gift tax is actually paid because the lifetime exemption covers it

Sunset Warning: The $13.61 million exemption is scheduled to decrease to approximately $6 million (indexed) after 2025 when the Tax Cuts and Jobs Act provisions expire.

Basis of Gifted Property

Understanding the basis of gifted property is crucial for both the EA exam and practice. Gifted property receives carryover basis, not step-up basis like inherited property.

General Rule - Carryover Basis: The donee's basis equals the donor's adjusted basis at the time of the gift.

Special Rule - Loss Property: If the fair market value (FMV) at the time of gift is less than the donor's basis, there are two basis rules:

• For calculating gain: Use donor's basis (carryover)
• For calculating loss: Use FMV at date of gift

Example - Gain Property: Mom bought stock for $10,000 (her basis). She gives it to her son when the FMV is $25,000. Son's basis = $10,000 (carryover). If son sells for $30,000, his gain is $20,000.

Example - Loss Property: Dad bought stock for $50,000 (his basis). He gives it to daughter when FMV is $30,000.

• If daughter sells for $60,000: Basis = $50,000, Gain = $10,000
• If daughter sells for $20,000: Basis = $30,000 (FMV at gift), Loss = $10,000
• If daughter sells for $40,000: No gain or loss (falls in the "dead zone" between $30,000 and $50,000)

Key Distinction from Inherited Property:

• Gift: Carryover basis (donor's basis transfers to donee)
• Inheritance: Step-up basis to FMV at date of death

Form 709 Filing Requirements

Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, must be filed when:

Filing Deadline: April 15 of the year following the gift. If the donor obtains a filing extension for their income tax return (Form 4868), the Form 709 deadline is also extended.

Who Files: The donor (person making the gift) files Form 709, not the recipient. Each spouse files their own Form 709 when gift splitting.

Valuation Date: Gifts are valued as of the date of the gift, not year-end.

Gift Tax Rate Structure

The gift tax uses the same rate schedule as the estate tax, with rates ranging from 18% to 40%. However, most taxpayers never pay gift tax because:

1. The annual exclusion shelters most gifts
2. The $13.61 million lifetime exemption covers large gifts
3. Unlimited exclusions (tuition, medical, spouse, charity) have no ceiling

When Gift Tax Is Actually Paid: Gift tax is owed only when cumulative lifetime taxable gifts exceed the lifetime exemption. Given the $13.61 million exemption for 2024, this affects very few taxpayers.

Taxable vs. Non-Taxable Gifts: Summary Table

EA Exam Tips for Gift Tax

1. Memorize Key Numbers for 2024:

   • Annual exclusion: $18,000 per donee
   • Gift splitting: $36,000 per donee
   • Lifetime exemption: $13.61 million
   • Non-citizen spouse: $185,000

2. Direct Payment Rule: Tuition and medical exclusions require direct payment to the institution/provider. Money given to pay these expenses is a regular gift.

3. Gift Splitting Trap: Any gift splitting election requires Form 709 from both spouses, even if no tax is owed.

4. Basis Questions: Remember gifted property gets carryover basis (donor's basis), not step-up like inherited property. Watch for the "loss property" rule with dual basis.

5. Present vs. Future: The annual exclusion only applies to present interest gifts. Crummey powers convert future interests to present interests.

6. Filing Deadline: Form 709 is due April 15 (not the date of the gift). Extensions are available.

7. Who Pays: The donor is responsible for gift tax, not the recipient. The recipient never reports receiving a gift as income.

8. Unified Credit: Gift tax and estate tax share one lifetime exemption. Using exemption for gifts reduces the amount available at death.