Question

In: Accounting

In 2018, Henry and his wife, Wendy made the gifts shown belo. All gifts taxes are...

In 2018, Henry and his wife, Wendy made the gifts shown belo. All gifts taxes are of present interests. what is Wendy's gift tax payable for 2018 if the couple elects gift splitting and Wendy's previous taxable gifts(made in 1995) total 1 million?

Wendy's current gift were
to Janet...............$80,000
to Cindy.................70,000
to Henry.................50,000
Henry's current gift were to Janet 30,000

Solutions

Expert Solution

Gift is considered any money or equivalent transferred to any individual directly or indirectly. The gifts include cash or its equivalent including movable & immovable assets to any US Citizen including their own Children (excluding spouse) and is subject to gift tax. This is a federal tax applicable to all the gifts an individual gives during his/her life time.

Some examples of gift that are taxable are:

1, The educational expenses in excess of annual exclusion limit, if paid to the bank account of their son/daughter, is taxable unless the amount is  directly paid to the University. This is applicable only for tuition bills.

2. Money given to a friend without interest.

3. Money given to foreign spouses in excess of exclusion limits.

4. Property sold less than the fair market value, then the differential is considered as gift.

In other words any amount given to any person without anything in return of equal value is a gift and is taxable beyond the exclusion limits specified by IRS.

Exclusion limits

IRS is very liberal with their exclusions for calculating the tax. They have given annual exclusion limits and also life time limits and also various options to individuals to reduce the tax implications. The exclusion limits of revised from time to times keeping in pace with the inflation. As of 2018 the annual limit is $15K per person per year and $11.18M lift time exclusion limit.

1. The annual exclusion limit is $15K per person per year. This limit is applicable for both the husband and wife so they can both take benefit of the exclusions individually.

2. There is an life time exclusion limit also called as "Unified Credit" is the sum of all the gifts including gifts one bequests after their death. The life time exemption is $11.18 million. In addition, the lifetime exemption keeps increases periodically in line with the inflation and due to changes in legislation.

3. There is no limit for the value of gifts given to spouses who is a US Citizen. However, the tax is applicable for foreign spouses for gifts given in excess of $149K.

Rules for reducing the tax

1. The individual has the option to set off the excess gifts over and above the $15K in an year against the life time exclusion of $11.18 Million (limits as on 2018) and don't pay tax. Alternatively, the individual may choose to pay tax on the excess amount.

  • You sell a property worth $500K for $450K then the excess value of $50K ($500K - $450K) over the actual price is considered as gift and after applying the $15K exclusion remaining $35K is taxable. However, you have the option to set off this $35K against life time limit and don't pay tax.

2. The gift can be split between husband and wife since both have different exclusion limits - thus the value of gift given can be upto $30K per person per year.

  • Father & Mother give $15K each to their son for purchasing a property thus the total value of gift is $30K

3. IRS also allows carry forward and set off the excess gifts over the subsequent four years and hence the individual need not pay the tax for remaining 5 years. However, you cannot gift anything to that person in the subsequent 5 year.

  • Father gifts $75K to his Son as down payment for buying a property. Father can set off $15K for each of the year for 5 years (including the year the gift is given) and then don't pay any tax. As said, there cannot be any more gifts for 5 years to his son.

Tax Return

Any gifts over and above the annual exclusion must be reports to the IRS on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. This records how much you've gone over the annual exemption each year—the amounts that count against your lifetime exemption.

Tax rates

The gift tax rate varies from 18% to 40% depending upon the value gifted. Here is the completed tax rate table.

Solution to the question

In the given question, Henry is Wendy's husband hence there is no limit for the gifts given to spouse. Only the remaining amount is split between Henry & Wendy.

The amount given to Janet & Cindy are $180K ($30K by Henry and $150K by Wendy) is taxable.

Janet Cindy Total
Henry $          30,000 $                 -   $          30,000
Wendy $          80,000 $        70,000 $       150,000
Total $       110,000 $        70,000 $       180,000
Exclusions
Henry $          15,000 $        15,000 $          30,000
Wendy $          15,000 $        15,000 $          30,000
Total Exclusion $          30,000 $        30,000 $          60,000
Taxable Value $          80,000 $        40,000 $       120,000
Tax rate* 30% 30% 30%
Tax Payable $          18,000 $        18,000 $          36,000

*The tax rate is calculated on the total value of taxable gift i.e. $120K .

Wendy & Henry have an option either to pay the tax of $36K or set off against their lift time exclusion.


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