IRS Form 709: File and Pay the Federal Gift Tax
Americans can leave money to heirs before or after they die. Of course if you wait to leave your money to your heirs until after you pass away, there’s the federal estate tax to worry about, and sometimes the inheritance tax (it also varies state by state). Try to outsmart the IRS and give your money to your heirs so it doesn’t become part of your estate and you’ll get hit with the Federal Gift Tax. IRS Form 709 is for filing a tax return when you gift more than $13,000.
What is IRS Form 709 for?
Called United States Gift (and Generation-Skipping Transfer) Tax Return, IRS form 709 is a form you must fill out and submit when you do your federal income taxes, if you have given away more than a certain amount of money for that tax year. Each year the certain amount changes. It’s called the annual exclusion for gifts. Usually set around $13,000, it usually will creep higher each year due to inflation.
You see, the IRS doesn’t like money to change hands at all without them getting a piece of the pie. But that’s not the justification for the federal gift tax. Like the estate tax, the gift tax was set up to prevent the concentration of wealth among families, which is bad because it can lead to powerful family centers that could influence politics. Think of Europe in the old days before all the revolutions. Family was where it was at in determining your place in life and the power you’d have. It leads to great unfairness.
The Generation-Skipping Transfer Tax
But I digress…this is about the Federal Gift Tax and IRS form 709. Form 709′s name mentions another tax: the Generation-Skipping Transfer Tax. What in the world is that you say?
To understand the Generation-Skipping transfer tax, first take a look at the estate tax and how wealthy families might try and get around paying it. Let’s say a wealthy grandparent leaves his or her money to his children. Estate taxes will be paid. Then let’s say 10 years later those heirs leave the fortune to their kids. Again, estate tax paid.
So wealthy grandparents would skip a step and just leave the fortune to the grandchildren (hence skipping a generation) and pay the estate tax only once instead of twice.
So the IRS caught onto this and IRS form 709 is also used for generation-skipping transfers.