1 / 26

Chapter 12: The Gift Tax

Chapter 12: The Gift Tax. Chapter 12: The Gift Tax. THE 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 System.

julius
Download Presentation

Chapter 12: The Gift Tax

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 12:The Gift Tax Chapter 12: The Gift Tax

  2. THE GIFT TAX • Unified transfer tax system • Gift tax formula • Transfers subject to gift tax • Annual exclusion • Gift tax deductions • Gift-splitting • Tax computation

  3. Unified Transfer Tax System • 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. Unified Rate Schedule • Top marginal rate in 2003 • 49% on amounts exceeding $2M • Top marginal rate decreases between 2002 & 2010 to 35% on amounts exceeding $500K • Unified credit reduces tax $ for $ • See inside back cover for unified transfer tax rates

  9. Gift Tax Formula(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

  10. Gift Tax Formula(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

  11. Transfers Subject toGift Tax • Transfers for inadequate consideration • Transfers NOT subject to gift tax • Completed transfers • Gift tax consequences of certain transfers

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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 payments are a completed gift if policy owned by another

  17. Annual Exclusion • All gifts valued at FMV • Exclude transfers up to $11,000 (in 2003) 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

  18. Gift Tax Deductions(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

  19. Gift Tax Deductions(2 of 5) • 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

  20. Gift Tax Deductions(3 of 5) • 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

  21. Gift Tax Deductions(4 of 5) • Charitable contributions • Contributions in excess of $11,000 NOT reported on gift tax return if income tax deduction available and entire interest is gifted

  22. Gift Tax Deductions(5 of 5) • 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

  23. Gift-Splitting • Spouses may elect to treat gifts to third parties as coming ½ from each spouse regardless of who actually made the gift • Allows the couple to give up to $22,000 per donee per year w/o gift tax consequences

  24. Tax Computation(1 of 2) • Large gifts • Tax rates progressive, from 18% to 49% (tax base over $2M) in 2003 • 5% phase-out of lower rates repealed for tax years ending after 2001

  25. Tax Computation(2 of 2) • Unified credit • $345,800 against gift tax • Shelters $1M of taxable gifts from taxation • The unified credit for estate tax purposes increases above $345,800 in between 2002 and 2009

  26. End of Chapter 12 Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark atUniversity of Northern Colorado’sKenneth W. Monfort College of Businessrichard.newmark@PhDuh.com

More Related