Should I Document Gifts that are Below the Annual Gift Tax Exclusion Amount?

Jean McDevitt, Tax Principal
March 2015

This article addresses personal gifts to family members and friends, as distinguished from charitable contributions to charitable organizations.

Currently, the annual gift tax exclusion amount is $14,000 per person per year. This represents the maximum amount that can be given on an annual basis without diminishing the lifetime exclusion amount, which currently is $5,430,000 for 2015. It also represents the maximum amount that can be given without triggering the need to file a gift tax return. More specifically, if the combined fair market value of all gifts in a year to any one person is $14,000 or less, most gifts need not be reported on a federal gift tax return. To qualify, such unreportable gifts must have a “present interest,” generally meaning that the donee must have the unrestricted right to the immediate use, possession, or enjoyment of the gifted property. Gifts in trust often run afoul of the present interest requirement, mandating special reporting rules.

Assuming the gift meets all the requirements of an annual exclusion gift and is below the filing threshold, readers still should consider documenting the fact and amount of the gift. How is that best accomplished?

If it is a gift of cash or publicly traded securities, the donors should simply keep in their records documentation of the donee, date of gift, and the value. A copy of a cancelled check, bank statement, or investment statement will suffice.

If the gift consists of real estate, a closely held business interest, or tangible personal property, additional documentation is strongly recommended because those assets generally do not have a readily accessible market value, and the IRS could challenge at any time the taxpayer’s opinion of value. In such instances, the taxpayer’s best defense is a strong offense. Such a strategy would entail filing a gift tax return – even though not required – with appropriate documentation supporting the value of the gift. By filing the return with adequate disclosure, the statute of limitations period begins to run, thereby limiting the time during which the IRS can question values.

If the taxpayer chooses not to file a return for such gifts, the taxpayer should retain thorough documentation of the gift and its value indefinitely. Such documentation may include appraisals, business valuations and/or financial statements for business interests.

If you would like to discuss these matters further, please contact Jean McDevitt or your BNN professional at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.