A Guide to Federal and Connecticut Gift Taxes
This Informational Publication has been superseded by IP 99(9)
INTRODUCTION: Many people are not aware that the transfer of property by gift, including the transfer of real estate, may be subject to Federal and Connecticut gift taxes. This informational publication is intended to alert you to the fact that certain transfers of property are considered gifts. If you give a gift, you may be required to file a Federal Form 709, Gift Tax Return and a Form CT-709, Connecticut Gift Tax Return. Understanding the gift tax is important because if you are required to file a return and you do not do so, you may be charged various penalties.
Although this publication will only provide general information, it will refer you to additional state and federal publications that will assist you in complying with Federal and Connecticut gift tax requirements.
WHAT IS THE GIFT TAX?
A. The gift tax is a tax imposed on the transfer by gift of real or personal property.
WHAT TRANSFERS OF PROPERTY BY GIFT MAY BE SUBJECT TO GIFT TAX?
A. In general, all transfers by gift of real or personal property, whether tangible (such as a car, boat or jewelry) or intangible (such as cash) that are made by you (the donor) to someone else (the donee) are subject to the gift tax.
WHEN IS A TRANSFER OF PROPERTY CONSIDERED A GIFT?
A. In general, a transfer of property is a gift if the fair market value of the property exceeds the amount received (in money or other type of payment) for the property. Thus, if you give property to another person or entity or if you sell it (other than in the regular course of business) for less than it is worth, you may be making a gift.
WHAT IS THE DIFFERENCE BETWEEN A GIFT OF A PRESENT INTEREST AND A GIFT OF A FUTURE INTEREST?
A. With a gift of a present interest the donor is allowed an annual exclusion of $10,000 per donee. A present interest gift is the unrestricted right to the immediate use, possession, or enjoyment of the property, or the income from the property.
With the gift of a future interest, no annual exclusion is allowed. A future interest gift is a gift that will commence in use, possession, or enjoyment at some future date or time.
WHAT ARE SOME EXAMPLES OF GIFTS OF REAL PROPERTY?
A. Whenever you transfer title to real estate and you receive less than the fair market value of the property (in cash or other type of payment) and the transfer is not the result of a sale in the regular course of business, you may be making a taxable gift.
EXAMPLE 1: John owns a vacant lot. He conveys title to the property to his son. John does not receive any money or other type of payment from his son. John has made a gift to his son equal to the fair market value of that lot. John is allowed to deduct an annual exclusion of $10,000 from the value of gifts made to each person. If the fair market value of the lot is $25,000, the amount of the taxable gift is $15,000 (Gift $25,000--Annual Exclusion $10,000 = Taxable Gift $15,000).
EXAMPLE 2: Lois owns a house worth $125,000. She sells the house to a close friend for $25,000, a fraction of its value. She has made a gift to her friend of $100,000, the difference between the fair market value of the house and the selling price. [Fair Market Value $125,000-- Sales Price $25,000 = Gift $100,000]. Lois is allowed to deduct an annual exclusion of $10,000 from the value of gifts to each person. Lois has made a taxable gift of $90,000. [Gift $100,000--Annual Exclusion $10,000 = Taxable Gift $90,000.]
EXAMPLE 3: Ted owns a house worth $150,000. On October 5, 1996, Ted conveys title to the house to a close friend (non-family member) while retaining a 'life use'. Ted does not receive any money or other type of payment from his friend. Ted has made a gift of a future interest to his friend.
To determine the value of the gift, Ted should follow the directions in the Internal Revenue Service Publication 448, Federal Estate and Gift Taxes and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Because this is a gift of a future interest, Ted is not allowed to claim any annual exclusion. It should be noted that if Ted were to release his 'life use' in the future, he would be making an additional gift. This type of gift is valued in accordance with the I.R. Reg. §25.2512-5.
EXAMPLE 4: Mary owns a house worth $132,000. She conveys title to the house to her three children (family member) and retains a 'life use'. Mary does not receive money or any type of payment from her children. Mary has made a gift of a future interest to her children. Because this is a gift of a future interest to family members it is subject to the Special Valuation Rules (IRC §§2702 et seq.) The value of Mary's gift determined under the Special Valuation Rules is the property's fair market value (less encumbrances). Mary must pay the gift tax at the time of transfer. No annual exclusions are allowed because this is a gift of a future interest. It should be noted that if Mary were to release her 'life use' of the house in the future, there would be no additional gift as she has already paid the gift tax on the full value of the gift.
WHO IS REQUIRED TO FILE A FEDERAL GIFT TAX RETURN?
A. If the value of your gift(s) to any person during the calendar year is in excess of $10,000 or you are making a gift of a future interest regardless of the amount, you must report it by filing federal Form 709, Gift Tax Return, whether or not the gift results in a federal tax. However, you do not have to file a federal gift tax return for:
a. A transfer of a present interest to any person that is not more than the annual exclusion ($10,000);
b. A qualified transfer for educational or medical expenses; or
c. A transfer to your spouse that qualifies for the unlimited marital deduction.
NOTE: The above exceptions are fully explained in the IRS publications. See Related Forms and Publications at the end of this publication.
WHO MUST FILE A CONNECTICUT GIFT TAX RETURN?
A. If you were required to file a federal gift tax return, you may also be required to file Form CT-709, Connecticut Gift Tax Return. Whether or not you must file depends upon whether you are a resident or a nonresident of Connecticut.
A Connecticut resident who made a gift of real or personal property during the calendar year and who is required to file a federal Form 709, must file Form CT-709, Connecticut Gift Tax Return, if:
a. the gift is of any intangible property (such as cash); or
b. the gift is of real or personal property located in Connecticut.
A nonresident who made a gift of real or personal property and who is required to file a federal Form 709, must file Form CT-709 if:
a. the gift is of intangible property within Connecticut used in carrying on a trade or business within Connecticut; or
b. the gift is of real or personal property located in Connecticut.
WHO MUST PAY THE TAX?
The person making the gift is responsible to file federal Form 709 and Form CT-709 and pay the taxes due (if any). If the gift taxes are not paid when due, the person receiving the gift may have to pay the tax.
WHEN SHOULD THE RETURNS BE FILED?
A. Generally, the federal Form 709 and Form CT-709 must be filed, and the gift taxes paid, on or before April 15th annually for gifts made during the preceding calendar year.
WHAT HAPPENS IF A RETURN IS NOT FILED?
A. If you fail to file a return and pay the tax when due, you will be required to pay interest on the tax deficiency from the due date of the return and to pay any applicable penalties.
EFFECT OF THIS DOCUMENT: An Informational Publication is a document that addresses frequently-asked questions about a current Department position, policy or practice, usually in a less technical, question-and-answer format.
RELATED FORMS AND PUBLICATIONS: You may request the following publications about the Federal and the Connecticut gift taxes:
Call the Internal Revenue Service (IRS) at 1-800-829-3676 to order:
Publication 448, Federal Estate and Gift Taxes
Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return
Call the Connecticut Department of Revenue Services at 860-297-5962 (Hartford area or out-of-state) or 1-800-382-9463 (in-state) to order:
Form CT-709, Connecticut Gift Tax Return and Instructions
FOR FURTHER INFORMATION: If you have additional questions about the Federal gift tax, call the Internal Revenue Service at 1-800-829-1040. Telecommunications Device for the Deaf (TDD/TT) users only, call 1-800-829-4059.
FOR FURTHER INFORMATION: If you have questions about Connecticut taxes, please call the Department of Revenue Services during business hours, Monday through Friday:
- 860-297-5962 (Hartford calling area or from out-of-state); or
- 1-800-382-9463 (toll-free from within Connecticut)
Telecommunications Device for the Deaf (TDD/TT) users only call 860-297-4911 during business hours.
FORMS AND PUBLICATIONS:
You may obtain forms and publications at any hour, seven days a week:
Telephone: use the phone numbers listed above and select Option 3 from a touch-tone phone;
Internet: preview and download forms from the DRS web site: http://www.ct.gov/drs
Replaces: IP 94(1), issued 1/6/94