Question

Andy "Nard Dog" Bernard graduated from Cornell in May of 2018 with a BA in Women's Studies. As a graduation gift, Nard Dog's father, a widower, gave him an old Toyota Prius because, according to the father, "the Ferarri is more your brother's style and the old Prius reminds me of you." The Prius was originally purchased 8 years ago for $33,000 and today it is worth $16,000.

1. How much of the gift is subject to the gift tax?

2. If Andy's father sold the Prius for $16,000 and then gave Andy the proceeds from the sale, how much of the gift would be subject to federal gift taxes?

3. If Andy's father sold the Prius for $16,000 and then gave the proceeds from the sale to Cornell to pay for Andy's graduate school tuition, how much of the gift would be subject to federal gift taxes?

Answer 1

Answer

1. Amount of gift subject to gift tax is only $ 1,000.

Note :

In 2018, the gift tax exclusion limit is $ 15,000. Hence, only the amount over and above $ 15,000 is subject to gift tax and IRS form 109 to be filled.

Here, the fair value of car is considered as the worth of gift. So, taxable amount of gift is $ 16,000 - $ 15,000 = $ 1,000.

2. Amount of gift subject to gift tax = $ 1,000

Note :

The gift tax provisions will not change even if Andy's father gifted him a car or in terms of sale proceeds (cash).

Any asset money or money's worth is given to another person where full consideration is not received back is a gift.

3. If Andy's father give sale proceeds to Cornell, Amount of gift subject to federal gift tax = $ 0

Note :

Any amount given directly to an educational institution to pay tution fees as a gift is exempt from gift tax.

Here,  Andy's father directly give the sale proceeds of $ 16,000 to Cornell as a gift for his further studies, that amount is exempt from gift tax.

(Assumed that in above cases, Andy's father has lifetime gift tax exemption and has not reached $ 11.18 million in 2018. If he has exceeded the limit he will have to pay tax on taxable portion of gift that is on $ 1,000 )