It seems like every week we’re hearing about a new IRS target. Here’s the latest – gift tax. Pay attention if you live in California, Florida, Virginia, Connecticut, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Tennessee, Texas, Washington or Wisconsin.
We’ve seen the issue for years in the CPA world when elderly taxpayers attempt to move assets to avoid estate tax or maybe to qualify for medical assistance programs. The problem is if you simply transfer the title on your house or other property for no money and without filing a Form 709 (gift tax return), you have a big tax issue.
And the IRS knows it.
They have select the 16 states listed above to review each and every property transfer.
There are exemptions to the gift tax. For example, you can give $13,000 from one person to another. So Mom and Dad could gift $52,000 in total to their son and his wife. There is also a lifetime limit you can use when you’re gifting. And there are smart ways to make transfer with notes that partially forgive each year, using the annual gift tax exemption. But you must do the paperwork that supports taking those exemptions and that often means having a Form 709.
If you or an elderly parent transferred property without properly reporting it with a Form 709 and the IRS catches you, there will be 35% gift tax, penalties and interest. Even worse the transfers may have occurred at the boom years of real estate value. There could be gift tax, penalties and interest due based on higher prices, but now on property that has gone way down in value.
Can it be fixed? Absolutely. But you have to fix it before the IRS catches you!