Common Mistakes in Gift Tax Valuation and How to Avoid Them?

Gifting assets to family or friends can feel rewarding, but the tax rules surrounding such gifts are strict. One key rule is the proper Gift Tax Valuation of those assets. A mistake here can lead to audits, extra taxes, or legal trouble. These errors often happen because people either don’t know the rules or skip expert help. Let’s explore the most common mistakes in Gift Tax Valuation and how to avoid them with simple steps.

Missing the Gift Tax Return Requirement

Many people forget to file Form 709 when needed. If a gift’s value crosses the yearly limit set by the IRS (currently $18,000), a gift tax return becomes necessary. This includes money, property, or any other item of value. Some assume gifts between family members don’t count, but they do. Failing to file on time may result in penalties.

Incorrect Valuation of Non-Cash Assets

Items like property, stocks, or art require careful appraisal. People often guess the value of a Gift Tax Valuation, but that approach doesn’t work when gifting real estate, business shares, or collectables. An incorrect estimate can cause trouble during audits. It’s safer to use certified appraisers to determine the fair market value before submitting the report.

Using Discounts Without Proof

Taxpayers sometimes apply valuation discounts without providing sufficient backing. When gifting shares in a private business, donors often reduce the value by using discounts. These may include a lack of marketability or control over the asset. While these are legal, they must be clearly explained in return. Missing this step can result in the IRS rejecting the discount.

Filling the Wrong Section on the Form

Form 709 has different sections for different types of gifts. For example, gifts to trusts or grandchildren must be reported under specific categories. Incorrect placement can affect tax outcomes, especially with generation-skipping transfers (GST). Carefully match the type of gift with the correct section.

Not Starting the IRS Audit Window

The IRS gets more time to question your gift if you skip details. If you do not include enough information in your gift return, the IRS can audit it at any point in the future. But if you file with full disclosure and supporting documents, the clock starts ticking. After three years, they can no longer challenge it.

Ignoring State-Level Gift Rules

Some states may have their own gift or inheritance taxes. Even if you follow federal law, state taxes can apply. Not all states charge them, but it’s important to check. Always speak with a local expert if you’re unsure. What’s fine in one state could lead to extra payments in another.

Conclusion

Mistakes in Gift Tax Valuation are easy to make but hard to fix later. A missing return, wrong value, or poor documentation can create problems. To stay safe, follow the IRS rules, file forms accurately, and seek assistance for complex gifts. Always include complete details, especially for non-cash assets. Don’t rely on rough guesses. When needed, work with tax advisors or certified appraisers. Doing it right the first time saves time and trouble. Being careful today protects you from bigger issues tomorrow.