Gift Taxes: What Your CPA Doesn’t Know

Taxpayers who gifted substantial assets to family members last year could be in for bitter surprise this tax season: potential errors on federal gift-tax returns that may cost donors taxes on gifts that they thought were tax-free.

(Related: Brooklyn Court Dumps Marriage Contract In Unprecedented Action)

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%. But in the end, lawmakers decided to leave the exemption intact, and raised the rate only five percentage points, to 40%.

Adding to the problem, Form 709, the gift-tax return, is a potential trap for accountants, particularly when the taxpayer gave something other than securities or put the gift into a trust, common in 2012. Form 709 applies to gifts exceeding $13,000 in 2012. Filing incorrectly can result in a weighty tax bill for an individual who expected to pay no tax on a gift at all. Also, an error can saddle heirs with a surprise bill even decades after someone made them the gift.

(Related: Basic Estate Planning 101: What You Need to Know)

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

Graduate accounting programs used to train accountants to report more-complicated gift transactions, but some no longer do. Many professionals falter on Form 709, which 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 a generation younger or more. Estate planners consider the generation-skipping tax to be exceptionally complicated.

(Related: Marriage and estate planning: How it affects you)

Many experts recommend that taxpayers have a lawyer review, if not prepare, the gift-tax return. The 709 is unique and many CPAs seem happy to have someone else do it.

Read more: http://online.wsj.com/article_email/SB10001424127887324373204578374792220436214-lMyQjAxMTAzMDIwMzEyNDMyWj.html?mod=wsj_valettop_email&goback=.gde_158792_member_225687483

Mr. Witzke practices in the areas of estate and gift tax planning, financial planning, retirement planning, LGBT civil rights, charitable giving, elder law, and small business planning. He focuses on helping clients grow, protect, and transfer wealth efficiently. Mr. Witzke is a past president and board member of the Financial Planning Association of Michigan, a member of the board of directors for Leadership Oakland, and a member of the planned giving advisory committees of Wayne State University and the Community House in Birmingham. Follow Mr. Witzke on Twitter @gr8estatelawyer.