1 Chapter 12: The Gift Tax. 2 THE GIFT TAX n Unified transfer tax system n Gift tax formula n...

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Chapter 12:The Gift Tax

THE GIFT TAXTHE GIFT TAX

Unified transfer tax system Gift tax formula Transfers subject to gift tax Annual exclusion Gift tax deductions Gift-splitting Tax computation

Unified Transfer Tax Unified Transfer Tax SystemSystem

Excise tax on wealth transfer when adequate consideration not received

Components of transfer tax system Purpose of transfer taxes Tax on wealth transfers Cumulative and progressive tax Unified rate schedule

Components of Transfer Tax System

Gift tax: Inter vivos transfers– Transfers while alive

Estate tax: Testamentary transfers– Property ownership transfers at death

Generation-skipping transfer tax– Property transferred to a second or younger

generation

Purpose of Transfer Taxes

Raise revenue for federal government Prevent evasion of estate tax Recover revenues lost by shifting

assets to taxpayer in lower income tax bracket

Redistributing wealth

Tax on Wealth Transfers

Gifts & inheritances NOT income Person making gift has PRIMARY

obligation to pay any tax due Tax applies to act of transferring

property Tax applied against FMV of gift

Cumulative & Progressive Tax

All taxable gifts made after 1976 accumulated for each donor

Cumulative total determines tax rate applied to current gift

Prior gift taxes paid and/or unified credit may negate or reduce amount of current tax due

Unified Rate Schedule

Top marginal rate in 2002– 50% on amounts exceeding $2.5M

Top marginal rate decreases between 2002 & 2010 to 35% on amounts exceeding $1.5M

Unified credit reduces tax $ for $ See inside back cover for unified transfer tax

Gift Tax FormulaGift Tax Formula(1 of 2)(1 of 2)

All individual’s gifts for current period

- ½ of 3rd party gifts w/gift-split election

+ ½ of spouse’s gifts w/gift-split election

- Annual exclusion ($11K per donee)

- Marital deduction (unlimited)

- Charitable contrib deduction (unlimited)

= Taxable gifts for current period

Gift Tax FormulaGift Tax Formula(2 of 2)(2 of 2)

Taxable gifts for current period+ All prior taxable gifts= Cumulative taxable gifts (CTG) Compute tax on CTG w/current rates- Tax on prior gifts w/current rates= Tax on current gifts- Net Unified credit= Tax payable for current period

Transfers Subject toTransfers Subject toGift TaxGift Tax

Transfers for inadequate consideration Transfers NOT subject to gift tax Completed transfers Gift tax consequences of certain

transfers

Transfers for Inadequate Consideration

Transfer of cash, stock, securities or real estate

Forgiveness of debt Assignment of a life insurance policy Transfer of federal, state, or municipal

bonds Transfer of other assets

Transfers NOT Subject toGift Tax

Transfers in normal course of business Qualified transfers for direct payment of

educational tuition or medical care Transfers to political organizations Property settlements in divorce Transfers disclaimed by recipient Incomplete transfers

Completed Transfers

Gift does not occur until transfer is complete Transfer complete when donor has given up

“dominion & control– Leaves donor no power to change gift’s

disposition, whether for own benefit or for benefit of another

Gift valued at FMV upon transfer

Gift Tax Consequences ofCertain Transfers (1 of 2)

Creation of joint bank accounts– Incomplete transfer until “donee”

withdraws funds Creation of other joint tenancies

– All joint tenants own an equal share– Donee’s ownership portion is a completed

Gift Tax Consequences ofCertain Transfers (2 of 2)

Transfer of life insurance policies– Changing beneficiary an incomplete gift

– Irrevocable transfer of policy ownership rights is a completed gift

– Premiums pmts are a completed gift if policy owned by another

Annual ExclusionAnnual Exclusion All gifts valued at FMV Exclude transfers up to $11,000 (in 2002) per

person per donee each year– Indexed for inflation after 1998

Husband and wife may each give $11,000 per child w/o tax consequence

Gift must constitute present interest

Gift Tax DeductionsGift Tax Deductions(1 of 5)(1 of 5)

Martial deduction – Unlimited tax-free transfers between

husband and wife– Some terminal interests ineligible for

martial deduction»Terminal interest is an interest that ends or is

terminated when some event occurs (or fails to occur) or a specified time passes

Marital deduction (continued)– Transfers of qualified terminal interest property

(QTIP) eligible for marital deduction– QTIP is property

»Property transferred by donor-spouse in which donee has qualifying income interest for life AND

»A special election has been made

Marital deduction (continued)– Qualifying income interest for life

»Spouse entitled to ALL income from property annually or more often AND

»No person has power to appoint any part of property to any person other than donee-spouse unless power cannot be exercised while spouse is alive

Charitable contributions – Contributions in excess of $11,000

NOT reported on gift tax return if income tax deduction available and entire interest is gifted

Charitable contributions (continued) – If charity is a qualified organization,

amount of gift above $11,000 allowed as a deduction

– No gift tax due since taxable amount zero

Gift-SplittingGift-Splitting

Election to treat each spouse as giving 1/2 of each gift given

Allows one spouse to give up to $22,000 per donee per year w/o tax consequences

Tax ComputationTax Computation(1 of 2)(1 of 2)

Large gifts– Tax rates progressive, from 18% to

50% (tax base over $2.5M) in 2002

– 5% phase-out of lower rates repealed for tax years ending after 2001

Tax ComputationTax Computation(2 of 2)(2 of 2)

Unified credit– $345,800 in 2002 for gift tax

»Completely eliminates tax liability on $1M of taxable gifts

– Credit against estate tax increases between 2002 and 2009

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1 Chapter 12: The Gift Tax. 2 THE GIFT TAX n Unified transfer tax system n Gift tax formula n...

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