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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.

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Chapter 12: The Gift Tax

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  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

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