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Chapter 13. Estate Tax Extra File

Chapter 13. Estate Tax Extra File. Howard Godfrey, Ph.D., CPA Professor of Accounting. The student should be able to: 1. Describe the formula for the estate tax. (Pg. 2) 2. Describe the methods for valuing interests in the gross estate. (Pg. 6)

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Chapter 13. Estate Tax Extra File

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  1. Chapter 13.Estate TaxExtra File Howard Godfrey, Ph.D., CPA Professor of Accounting

  2. The student should be able to: 1. Describe the formula for the estate tax. (Pg. 2) 2. Describe the methods for valuing interests in the gross estate. (Pg. 6) 3. Determine which interests are includible in the gross estate. (Pg. 8) 4. Identify deductions available for estate tax purposes. (Pg. 18) 5. Calculate the estate tax liability. (Pg. 23) 6. Identify provisions that alleviate liquidity problems. (Pg. 28) 7. Recognize the filing requirements for estate tax returns. (Pg. 35)

  3. Hint: • Date of death for taxpayer was April 27. • Do not consult April 27 newspaper to get stock value for the estate tax return. Why?

  4. 1. Describe the formula for the estate tax. (Pg. 2)

  5. If you want a simple estate tax law, you need a simple economy – or be willing to have widespread avoidance of the tax.

  6. When does this transfer take place? I give you my home today, but I reserve the right to live in the home as long as I live. I die in 2010 and you take possession of the home at that time.

  7. Wonderful Phone Call I just answered my phone and the caller left a message for you. Your distant aunt recently died and left you an office building, which was her only asset. The office building is located in New York and it is worth $100,000,000. It is all yours.

  8. Wonderful Phone Call - More I just answered my phone and the caller had a message for you. Your distant aunt recently died and left you an office building which was her only asset. The office building is located in New York and it is worth $100,000,000. I could not understand the last sentence, but it was something about the building being subject to a mortgage of $99,999,900. How much estate tax will be paid by your aunt’s estate? If there is no debt do you have a problem?

  9. Estate Tax-Big Picture-1 of 3 Starting point is total value of assets owned at death. This is Gross Estate. §2031, §2032 You subtract funeral expenses, debts, expenses, losses, etc. that take away from the value of the estate. §2053-2054 Amounts left to charity are deducted. §2055 Assets left to a surviving spouse are deducted without limit. §2056 What you have left is Taxable Estate. §2051 [However, taxable estate may not be the base on which you compute estate tax.]

  10. Estate Tax-Big Picture-2 of 3 Add decedent's Adjusted Taxable Gifts to the taxable estate. Adj. taxable gifts are defined in Code § 2001(b) as the total taxable gifts (after any available exclusion or deduction) made after 1976 other than gifts includible in the gross estate of the decedent. The transfer tax rates of §2001(c) are then applied to the sum of : (1) the taxable estate plus (2) adjusted taxable gifts. §2001 This gives tentative tax which is then reduced by any gift taxes paid or payable at current rates for gifts made after December 31, 1976. §2001(c)(2) Result: Federal estate tax liability before credits.

  11. Estate Tax-Big Picture-3 of 3 Start with Federal estate tax liability before credits. 1. Deduct the Unified Credit. §2010 2. If property is subject to death tax in a foreign country, take a credit for foreign tax. §2014 3. If property in this estate was taxed in another estate recently, compute a credit to help reduce double estate taxation. §2013 4. If tax was paid in prior years on gifts included in the gross estate, take a credit for that. §2012 Result: Federal estate tax liability

  12. Introductory problem – Joe’s Estate An alumnus (Joe) died in 2006 with total assets of $2,000,000, and no debt. He left $100,000 to the UNC Charlotte Accounting Department (Tax Program). The rest of his assets (after taxes) go to a neighbor who was very helpful when he was sick. There are no expenses for the estate. There is no state death tax in this problem. How much federal estate tax is due?

  13. 2. Describe methods for valuing interests in the gross estate. (Pg. 6)

  14. [Pg. 6] Jan, who died on November 15, owned 1,000 shares of Tractor Corporation stock. Tractor stock, traded on the New York Stock Exchange, traded at a high of $120 and a low of $118 on November 15. The total value of the block of Tractor stock on her estate tax return is.

  15. [Pg. 7] If the executor of a decedent's estate elects the alternate valuation date and none of the property included in the gross estate has been sold or distributed, the estate assets must be valued as of how many months after the decedent's death? a. 3 b. 6 c. 9 d. 12 CPA Nov. 1994 - Sec. 2032

  16. When deciding among alternative estimates of value of estate assets (see preceding slide), what opposing objectives are faced?

  17. 3. Determine which interests are includible in the gross estate. (Pg. 8)

  18. 4. Identify deductions available for estate tax purposes. (Pg. 18)

  19. [Pg. 18+] Laura’s gross estate equals $2,000,000. Laura was single. Given the following payments by her estate, determine Laura’s taxable estate:  • Charitable contribution specified in Laura’s will $100,000 • Funeral expenses 10,000 • Medical expenses claimed on Laura’s Form 1040 20,000  a. $1,870,000. b. $1,880,000. c. $1,890,000. d. $2,000,000. [IRS-03-3#73]

  20. 5. Calculate the estate tax liability. (Pg. 23)

  21. Becky died on 1-1-05, with $1,600,000 in savings, stock worth $1,500,000. Surviving spouse incurred expenses of $100,000 settling the estate. Stock goes to the surviving spouse. All other assets (after taxes and expenses) go to her brother who has significant need as a result of high medical costs. (Cont’d Next Slide)

  22. Cont’d.Becky lived in a state that has no death tax. She had never made a gift. What is the federal estate tax after all credits? a. below $30,000 b. between $30,000 and $40,000 c. between $40,000 & $50,000 d. between $50,000 & $200,000 e. above $200,000 [Use worksheets on following slides]

  23. MaryAnn (a widower) made a gift of $2,111,000 to her only child in 2005 (MaryAnn’s first gift ever) and paid the gift tax. MaryAnn died in 2007, leaving all of her estate ($3,000,000) to her only child? There is no state or foreign death tax. The estate has no debts or expenses other than federal estate tax, if any. How much federal estate tax must be paid to the IRS? a. $30,000 b. $421,000 c. $915,000 d. $482,000 e. Other

  24. 6. Identify provisions that alleviate liquidity problems. (Pg. 28)

  25. 7. Recognize filing requirements for estate tax returns. (Pg. 35)

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