Don’t Gamble with Gift Tax Returns
Gifting has been discussed at Isaac Brock from time to time, especially related to the Exit Tax. For any of you that have gifted, the above Forbes article may be your reminder that the process is to be reported on Form 709.
But now the lawyers have one more reason to be busy: You must report 2012 gifts on Form 709 even if you don’t owe tax. Among other things, that’s so the IRS will know how much of the $5.12 million ($5.25 million for 2013) tax-free amount you have used so far.
Do-it-yourself types can download the form as a fillable PDF plus the instructions that go with it from the IRS web site
For the 2011 tax year, there were 219,544 gift tax returns filed, according to IRS statistics which download here as a PDF. However, very few of them — about 3,000 – involved gifts of $1 million or more. Most related instead to using what’s called the annual exclusion. This is the amount that you are allowed to give, in cash, property or gifts, to as many people as you want each year without dipping into your lifetime exemption amount. Last year the annual exclusion was $13,000. The annual exclusion for 2013 is $14,000. (See “IRS Raises Yearly Limit For Tax-Free Gifts.”)
There are various reasons why you might need to report these relatively small (in the scheme of things) gifts. To come within the annual exclusion, a gift must be a present interest, meaning that the recipient can use the gift immediately. That’s certainly true with cash, but can be a different story with gifts to trusts, in which beneficiaries don’t have any rights until later. Any time you make a gift that isn’t a present interest, it must be reported, no matter how small the amount.
I am convinced that citizens of “The Land of the Free” (whether Homelanders or Americans Abroad) are among the least free people in the world. Every aspect of their behavior is regulated.
Well, at least in this case the penalties are logical and only apply to unpaid tax. If a person doesn’t file a gift tax form (or files it late) but there is no tax due (and there usually isn’t, because of the very large exemption), there is no penalty.
I may be wrong (please correct if I am) but I believe that a US citizen can gift about $140,000 each year to a non-US citizen spouse each year without filing a 709. If so, this could be useful.
Gifts to your spouse. You must file a gift tax return if you made any gift to your spouse of a terminable interest that does not meet the exception described in Life estate with power of appointment, or if your spouse is not a U.S. citizen and the total gifts you made to your spouse during the year exceed $139,000.
@IRSCompliantForever and others:
Here is another part of Form 709 Instructions (again, so, so difficult to understand legalese terminology!): http://www.irs.gov/pub/irs-pdf/i709.pdf
Can anyone please let me know if there is a fatal flaw to this gifting plan, which deals only with US citizens living abroad who are married to non-US citizen spouses?
The aims of the plan are to: 1) decrease or eliminate capital gains taxes of US persons on sale of foreign house; and 2) keep house assets to a minimum on IRS 8854.
The plan is for the US citizen to give to the spouse once a year increased % ownership of the “jointly owned” house that is equivalent to the yearly dollar exemption on IRS 709 (now about $140,000). Depending on the value of the house this might change the split in ownership from the original 50:50 to say 30% US person: 70% spouse etc. This yearly process could be repeated.
The change in ownership split would be accomplished by a real estate lawyer at approximate cost of $500 in Canada (nothing compared to capital gains tax consequences if over the 250k exclusion). In Ontario (elsewhere?) the new split would change the type of ownership from “joint tenancy” (equal split, automatic survivorship) to “tenants in common” (no automatic survivorship but this can easily be dealt with in the wills; variable % splits allowed).
If the gifting per year does not involve more than $140,000 (for 2013) then IRS does not need to be notified by form 709. However, mean-spirited 8854 instructions insist that “If there have been significant changes in your assets and liabilities for the period that began 5 years before your expatriation and ended on the date that you first filed Form 8854, you must attach a statement explaining the changes.” On the other hand, I would argue that the US person is just taking advantage of an IRS-permitted gifting privilege.
Is the above actually accurate and is there any downside or flaw to this plan?
There was no response to my posting above on gifting portions of the principal residence to non-US person spouse and, as I now have more experience, I will answer in part my own question.
This posting is directed only to those IBS readers who are 1) US persons living in a country like Canada where there is no capital gains tax on sale of principal residence; 2) married to a non-US person spouse; 3) have the misfortune of owning a principal residence (home) that has appreciated in value over the years in part because of changes in Canadian-US dollar exchange and which, because you are a US person, is subject to US capital gains tax that might in time exceed the exemption; and 4) still wish to be IRS compliant.
This might also be an issue for those concerned about assets on IRS 8854 should you be a “mature” US person abroad who owns a home and has a nice pension (not yet drawn upon) with, unfortunately, a substantial total dollar value.
My suggestion above was for the US person to gift each year, for love and affection only, a percentage of the home to non-US spouse that is equivalent to the yearly exemption ($143,000 for 2013) permitted by IRS until the US person share of home-asset is very low. There might be so much love and affection that the non-US person spouse, after a number of years of gifting, could own 98% of the house.
I still believe that this is a good idea for some, depending on the value of the home and capital gains, but that the benefits have to be calculated and weighed against the costs. The issues I have discovered include:
-Going from joint tenancy (equal share, right of survivorship) to tenants in common (unequal shares, no right of survivorship) means that survivorship rights will have to be sorted out (easily) in a will that you probably already have and, after death, there will be probate fees (at least in Canada). Just compare cost of capital gains tax on sale of house /covered expatriate (catastrophic) consequences if assets on 8854 too high vs. probate costs.
-If you have a mortgage or line of credit on the house, your bank will need to approve gifting as the title will be changed (should not be a problem).
-I would recommend that the really simple change in title be accomplished only by a real estate lawyer–go cheap and skip any costly consultation.
-Document in detail the gift transaction on a paper signed and dated by US person, spouse, and witness and include a copy of appraised value of house and printout of US dollar exchange rate at time of the title change.
-Confirm that what I say is likely to be true by reading instructions to IRS 709 and by googling this issue.
I am not a tax professional and welcome any comments especially downsides that I have missed.
Thanks for the lengthy post on this subject. I had been waiting to see what responses your original query might result in.
I do have one question: do you see any issues with doing a one-time greater-than-$143,000 gift? I realize that this requires filling out an IRS gifting form. And I imagine the obvious issue is that it may raise a flag of some sort. But other than that, do you see a problem with it? It should be allowable, right?
If you are looking at the lifetime gift tax exemption to enable shifting of assets these articles may be helpful to you:
I only could give the 2 articles a quick skim (will read in depth later), but they both look quite useful.
@tdott, you ask:
“I do have one question: do you see any issues with doing a one-time greater-than-$143,000 gift?”
I did not research as carefully your good question, which I had considered, and vaguely recall that this is possible— you must confirm— but I really am opposed to filing any forms whatsoever to IRS and will always keep just under the annual exclusion limit so I do not have to file 709–even if there is an extra cost to doing this.
If anyone finds out with some certainty that higher amounts gifted to non-US spouse are ok (e.g., up to the lifetime maximum limit of $5 million) it would be helpful to post this information.
I do know that others in my same situation are also keeping under the annual exclusion limit–for whatever reason.
I can certainly understand the desire to not want to paint a target on oneself.
Personally, I just want to get tax compliant and get out ASAP, so gradualism is not the first choice.
I’ll post if/when I find out anything more on this.
This website seems to suggest that you can use either the annual $143,000 exclusion or, as you would much prefer, a big (e.g., one or more-time) chunk of the $5 million lifetime exemption: http://www.shawamerican.com/pdfs/jh/John%20Hancock%20Estate%20Planning%20for%20a%20Non%20Citizen%20Spouse.pdf)
Assuming this is correct, you could dispose much of your assets quickly by gifting e.g., for 8854 purposes.
See similar discussion below on this point in Hodgen (http://hodgen.com/question-about-expatriation-from-reader/
“…This is the first line of defense. A U.S. citizen can give away assets tax-free up to $5 million. Current rules, that is. If the recipient of that largesse is a non-U.S. spouse, it doesn’t matter. File the gift tax return. Do the paperwork. Ideally that will bring the U.S. citizen’s net worth below the magic $2,000,000 mark. At that point it is an easy expatriation. This strategy has the advantage of being legitimate, fully-disclosed, and correct…”
“Whether the IRS likes it or not – under current rules you’re allowed to “gift” $5M away to anyone.”
To clarify why I don’t like filing any forms to IRS and prefer the slower route so I do not have to file 709: Apart from the obvious in principle reason, I continue to fear making a simple honest mistake on these (purposefully?) tricky forms that will send me quickly to financial ruin.
Good luck in compliance and getting out.
Other interesting, creative gifting thoughts (to be verified for safety) to help the US person also discussed in Hodgen: http://hodgen.com/question-about-expatriation-from-reader/
“Just a thought – if a couple were two different citizenships (one US, the other say European), couldn’t the US citizen transfer assets into his non-US spouse’s name, fill in the 8854 with a net worth under $2M, renounce, and afterwards put their financial house back the way it was?” “Apart from pensions etc, couples are allowed to transfer assets to each other in many countries without a tax penalty.”
“Gift property to an aging parent who is a non-resident alien, until it gets below the magical mark. Then expat and wait till they pass away (rather morbid, I agree) and leave it to you, assuming their country of residence does not have an estate tax or gift tax (when you gifted them sum).”
“The primary risk that I can see is an attack by the IRS claiming this is a phony arrangement….But leaving the assets with the parents until death and receiving them back via inheritance would be likely to stand. Enough time elapses, wills can be changed, etc. These items introduce real risks that the expatriate might not get the property back. Thus the fact pattern would have a good shot at succeeding.”
“…if it might be useful to have an unequal division of assets between the spouses… then do a postnuptial agreement to create the reality you’d like to present to the Internal Revenue Service.”
Thanks for the link – very useful.
In countries with capital taxes, such as the Netherlands and Switzerland, taxpayers must report their taxable assets annually for tax assessment purposes. If the US taxpayer, resident in a country with a capital tax, gifts some of his/her assets to reduce the Form 8854 assets to under $2 million, the non-US tax authorities may inquire to whom the assets were gifted, etc. In some cases, receipts of gifts can be a taxable event in non-US countries. As always, proper planning should be done.
@Innocente makes a good point that really needs to be emphasized.
The only practical gifting experience I have (mentioned above) is limited to a gift of a portion of a principal residence from a US person to a non-US person spouse in Canada–and even after being told by a professional that this is ok, I still worry. That is one reason why I put out the posting, to discover whether any reader could find a flaw in the plan.
As @Innocente warns, any gifting plan must be carefully verified as “safe to use” in your particular country and situation.
My impression is that you live in Ontario where the Family Law Act makes it clear that regardless of whose name the matrimonial home is in, it is a 50 50 ownership. It seems to me that one could argue that, because of the problem of US citizenship, that it is essential for any non-US spouse in a “carcenegenic marriage” (you know what I mean) to absolutely insist that his/her share of the title be put in his/her name. Therefore, I think that this may be a viable strategy. It clearly has a purpose beyond taxes – i.e. protection of her share of an asset that Ontario law decrees to be his/hers.
Also, if you are planning to stay married, it doesn’t affect the reality of your financial situation. So, why not explore that – do the $140,000 (aprox per year thing) until as much of the ownership as you need goes to your spouse.
Interesting though how, this all raises the question of how much trust you have in your marriage.
So again to “bottom line” my point – you are just making a transfer that reflects the expectations of the law of Ontario.
Ontario yes, 50-50 until you change the split to variable by going to “tenants in common”, but I believe that the same may hold true in other provinces in Canada (must be checked out).
I agree–gifting from a US person to non-US spouse really is made for love, affection, and protection from harm.
My wife and I still like each other and I do have trust that even when I own only 2% of the house I will be ok. However, I have noticed that over the recent years she appreciates less the increasingly toxic US person side of me….
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