Written by attorney Ilene L McCauley


Taxpayers who gave substantial assets to family members last year could be in for a nasty surprise this tax season: potential errors on federal gift-tax returns that could result in donors owing taxes on gifts they thought were tax-free.

Part of the problem: Many taxpayers rushed to give during the last months of 2012, afraid that Congress would scale back the $5.12 million gift-tax exemption to $1 million at year-end—and raise the tax rate on gifts exceeding that limit to 55% from 35%. (Lawmakers decided to leave the exemption—$5.25 million for 2013—intact, and raised the rate only five percentage points, to 40%.)

Making matters worse, Form 709, the gift-tax return, is a potential trap for many accountants, especially when the taxpayer gave something other than securities or put the gift into a trust, as many did in 2012.

Form 709 applies to gifts exceeding $13,000 in 2012. Filing incorrectly can mean a hefty tax bill for someone who expected to pay no tax on a gift at all. And an error can saddle heirs with a surprise tax bill even decades after someone made them the gift.

For 2012 tax returns in particular, it is important to have someone knowledgeable handle the form, says Jere Doyle, a senior wealth strategist at the Boston office of BNY Mellon Wealth Management, which oversees $179 billion.

"The problem is, you've got to find that person," he says.

Surprisingly few accountants have experience with more complicated reporting on a gift-tax return. Most know how to report smaller, annual gifts. But gifts of real estate or business interests—which were popular last year—or anything besides stocks and bonds, are a different matter.

Graduate accounting programs used to train accountants to report more-complicated gift transactions, but some no longer do, says Steven D. Baker, an estate lawyer and accountant in Austin, Texas.

A big stumbling block for many professionals is that Form 709 requires an advanced knowledge of rules for two separate taxes: the gift tax and the "generation-skipping tax," which imposes levies that wouldn't otherwise be incurred when families leave assets to heirs who are more than one generation younger. Yet certain estate plans can exempt these heirs from the tax. The generation-skipping tax is considered especially complex by estate planners.

Some experts recommend that taxpayers have a lawyer review, if not prepare, the gift-tax return. "I can see the potential for hurt feelings on the CPA's side," says Roger Pine, a partner at Briaud Financial Advisors, an advisory firm in College Station, Texas, that manages $480 million. "But I think the 709 is unique in that CPAs seem to be happy to have someone else do it."

Contact Ilene McCauley at 480-296-2036 or at [email protected] if you need any help with filing gift tax returns. Ilene is a certified tax specialist with significant experience in this area of practice. We look forward to hearing from you.

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