1
Chapter 12,
The Gift Tax
2
THE GIFT TAX
?Unified transfer tax system
?Transfers subject to gift tax
?Annual exclusion
?Deductions
?Gift-splitting
?Tax computation
3
Unified Transfer Tax
System
?Excise tax imposed on transfer of
wealth when adequate consideration
not received as part of exchange
?Components of transfer tax system
?Purpose of transfer taxes
?Tax on wealth transfers
?Cumulative and progressive tax
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
Transfers Subject to
Gift Tax (1 of 3)
?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
9
Transfers Subject to
Gift Tax (2 of 3)
?Transfers NOT subject to gift 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
10
Transfers Subject to
Gift Tax (3 of 3)
?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 upon transfer
11
Annual Exclusion
?All gifts valued at FMV
?Exclude transfers up to $10,000 per
person per donee each year
–Indexed for inflation after 1998,but still
$10,000 in 2001 due to rounding
?Husband and wife may each give
$10,000 per child w/o tax consequence
?Gift must constitute present interest
12
Deductions
(1 of 4)
?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
13
Deductions
(2 of 4)
?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
14
Deductions
(3 of 4)
?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
15
Deductions
(4 of 4)
?Charitable contributions
–Contributions in excess of $10,000 NOT
reported on gift tax return if deduction
available and entire interest is gifted
–If charity is a qualified organization,
amount of gift above $10,000 allowed as
a deduction
–No gift tax due since taxable amount zero
16
Gift-Splitting
?Election to treat each spouse as
giving 1/2 of each gift given
?Allows one spouse to give up to
$20,000 per donee per year w/o tax
consequences
17
Tax Computation
(1 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/ rates
= Tax on current gifts
- Net Unified credit
= Tax payable for current period
18
Tax Computation
(2 of 2)
?Large gifts
–Tax rates progressive & peak at 55%
–Phase-out of lower rates imposed as
a 5% surtax on tax bases between
$10,000,000 and $21,040,000
?A $30,000,000 taxable gift would be
taxed at a flat rate of 55%
19
Comments or questions about PowerPoint Slides?
Email Richard Newmark at Dr.Newmark@PhDuh.com
Chapter 12,
The Gift Tax
2
THE GIFT TAX
?Unified transfer tax system
?Transfers subject to gift tax
?Annual exclusion
?Deductions
?Gift-splitting
?Tax computation
3
Unified Transfer Tax
System
?Excise tax imposed on transfer of
wealth when adequate consideration
not received as part of exchange
?Components of transfer tax system
?Purpose of transfer taxes
?Tax on wealth transfers
?Cumulative and progressive tax
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
Transfers Subject to
Gift Tax (1 of 3)
?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
9
Transfers Subject to
Gift Tax (2 of 3)
?Transfers NOT subject to gift 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
10
Transfers Subject to
Gift Tax (3 of 3)
?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 upon transfer
11
Annual Exclusion
?All gifts valued at FMV
?Exclude transfers up to $10,000 per
person per donee each year
–Indexed for inflation after 1998,but still
$10,000 in 2001 due to rounding
?Husband and wife may each give
$10,000 per child w/o tax consequence
?Gift must constitute present interest
12
Deductions
(1 of 4)
?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
13
Deductions
(2 of 4)
?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
14
Deductions
(3 of 4)
?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
15
Deductions
(4 of 4)
?Charitable contributions
–Contributions in excess of $10,000 NOT
reported on gift tax return if deduction
available and entire interest is gifted
–If charity is a qualified organization,
amount of gift above $10,000 allowed as
a deduction
–No gift tax due since taxable amount zero
16
Gift-Splitting
?Election to treat each spouse as
giving 1/2 of each gift given
?Allows one spouse to give up to
$20,000 per donee per year w/o tax
consequences
17
Tax Computation
(1 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/ rates
= Tax on current gifts
- Net Unified credit
= Tax payable for current period
18
Tax Computation
(2 of 2)
?Large gifts
–Tax rates progressive & peak at 55%
–Phase-out of lower rates imposed as
a 5% surtax on tax bases between
$10,000,000 and $21,040,000
?A $30,000,000 taxable gift would be
taxed at a flat rate of 55%
19
Comments or questions about PowerPoint Slides?
Email Richard Newmark at Dr.Newmark@PhDuh.com
