How to File a Gift Tax Return: Step-by-Step Overview

Giving a large gift can have tax implications, and the IRS requires certain gifts to be reported. A gift tax return (Form 709) is used to disclose these gifts and determine whether any taxes are owed. While most people won’t pay gift tax due to high lifetime exemptions, filing requirements still apply in some cases.

Understanding when and how to file Form 709 ensures compliance with IRS regulations and helps avoid penalties.

Filing Thresholds

For 2024, individuals must file Form 709 if they give more than $18,000 to a single recipient in a year. This threshold applies per recipient, so a person can give multiple individuals up to $18,000 each without filing. However, if a donor gives $25,000 to one person, the excess $7,000 must be reported.

Married couples can use gift splitting to combine their exclusions, allowing them to give up to $36,000 to a single recipient without filing a return. Even if one spouse provides the full amount, both must agree to the split and indicate it on Form 709. Only one return is required.

Gifts exceeding the annual exclusion do not immediately result in tax liability but count against the donor’s lifetime exemption, which is $13.61 million in 2024. Once this exemption is exhausted, additional taxable gifts are subject to rates from 18% to 40%. The IRS tracks this through Form 709 filings, making accurate reporting essential.

Exclusions

Certain gifts are exempt from reporting and do not count toward the annual exclusion or lifetime exemption. Payments made directly to educational institutions for tuition qualify, but only if paid directly to the school. Other education-related expenses, such as books or housing, do not qualify.

Medical expenses paid directly to a provider also qualify, including doctor’s bills, hospital stays, and long-term care services. Payments must go straight to the institution or medical professional rather than the recipient.

Transfers between spouses are generally exempt due to the unlimited marital deduction, allowing one spouse to give any amount to the other without tax consequences, provided the recipient is a U.S. citizen. If the recipient is not a U.S. citizen, the exclusion is capped at $185,000 for 2024.

Determining Taxable Amounts

If a gift exceeds the reporting threshold and does not qualify for an exclusion, the taxable portion is calculated by subtracting the annual exclusion from the total value. For example, if a donor gives $22,000 to a friend in 2024, only the excess $4,000 is taxable and applied against the donor’s lifetime exemption.

For cash gifts, valuation is straightforward. Non-cash assets such as real estate, stocks, or business interests require fair market value (FMV) at the time of transfer. Publicly traded stocks are valued based on the average of the high and low prices on the transfer date. Closely held business interests often require a professional appraisal.

Certain gifts, such as minority interests in family businesses, may qualify for valuation discounts due to lack of marketability or control. The IRS closely examines these discounts, particularly in family-limited partnerships, to prevent artificial reductions in taxable value. Proper documentation is necessary to justify any claimed discount.

Required Documentation

Accurately completing Form 709 requires detailed records to substantiate gift values. For securities, this includes brokerage statements or historical price records. Real estate gifts require a qualified appraisal from a certified professional, as mandated by IRS regulations.

For closely held business interests, valuation reports must follow IRS guidelines, considering financial condition, earning capacity, and market comparables. Discounts for lack of control or marketability must be well-documented, as the IRS has increased scrutiny following court rulings.

If a donor applies special use valuation for certain real property, additional documentation is required to demonstrate compliance with use and ownership duration rules. Gifts involving promissory notes must include evidence of enforceability, interest rate compliance, and payment history.

Submission and Payment

Form 709 must be filed by April 15 of the year following the gift. If an extension is needed, filing Form 4868 for a personal tax return also extends the deadline for Form 709. However, an extension only grants additional time to file, not to pay any tax owed.

Payments can be made electronically through the IRS’s Electronic Federal Tax Payment System (EFTPS) or by mailing a check with the return. If a donor cannot pay the full amount, the IRS may allow installment payments, though interest will accrue. Donors who have exhausted their lifetime exemption may use estate planning strategies, such as valuation discounts or trusts, to manage future tax exposure.

Recordkeeping

The IRS can audit gift tax returns years after filing, making it important to retain copies of Form 709, appraisals, and supporting documents indefinitely. Proper documentation ensures accurate tracking of the lifetime exemption and prevents discrepancies in estate tax calculations.

For non-cash gifts, records should include valuation reports, transfer documents, and related correspondence. Donors making multiple gifts over time should maintain a detailed ledger to track cumulative amounts and ensure consistent reporting. Financial advisors often recommend keeping digital backups of all records to prevent loss, particularly for high-net-worth individuals engaging in complex gifting strategies.