Gift and Estate Tax Computation

[Kathleen Reynolds]

#3184

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This calculation computes the gross gift or estate tax, applies the proper unified credit, and determines the net tax payable. It also calculates the remaining net estate and the effective tax rate as a percentage of the net amount passing to the beneficiaries or donees after taxes.

The effective gift tax rate is less than the effective estate tax rate even though the taxes are calculated using the same unified table. The effective gift tax rate is lower because the gift tax rate is based on the amount received by other donees after taxes, while the estate tax is calculated on the value of the estate before taxes. In other words, the donor of a gift is not required to pay any gift tax on the money paid in gift tax.

The estate and gift taxes are based on a series of graduated rates that start at 18%. However, each person is allowed a unified credit that eliminates the tax in the lower estate and gift tax brackets.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the maximum estate and gift tax rate was reduced to 50% in 2002 (with no additional 5% tax), and declined by 1% each year after that until the maximum rate was 45% in 2009. The unified credit applicable exclusion amount was also increased to $1,000,000 in 2002, and the estate tax exclusion amount increased to $1,500,000 in 2004, to $2,000,000 in 2006, and to $3,500,000 in 2009. The deduction for family-owned business interests was repealed in 2004, and the entire estate tax was temporarily repealed in 2010.

The gift tax unified credit applicable exclusion amount remained at $1,000,000 after 2002 and the gift tax was not repealed, but in 2010 the maximum gift tax rate was reduced to 35%.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 made the following changes:

1. For the decedents dying in 2010, the executor can choose between (a) paying estate tax based on an exclusion amount of $5,000,000, a tax rate of 35%, and a new income tax basis on assets based on date of death values (or alternate valuation), or (b) paying no estate tax but complying with the EGTRRA carry-over basis rules (which are otherwise repealed).
2. For the year 2011, the unified credit exclusion amount is $5,000,000, and the tax rate is 35%, for both gift tax and estate tax purpose. The $5,000,000 exclusion amount is indexed for inflation after 2011, is $5,120,000 for 2012, $5,250,000 for 2013, $5,340,000 for 2014, $5,430,000 for 2015, $5,450,000 for 2016, $5,490,000 for 2017, $11,180,000 for 2018, $11,400,000 for 2019, $11,580,000 for 2020, $11,700,000 for 2021, $12,060,000 for 2022, and $12,920,000 for 2023. Future years (2024 and later) are estimates based on the Inflation Rate for Exclusion input.
3. The exclusion amount that remains unused at the death of a married person after 2010 may be used by the surviving spouse for estate and gift tax purposes.

The American Taxpayer Relief Act of 2012 creates a maximum 40% estate tax rate.

The program can also calculate the state death taxes (if any) imposed by any of the 50 states or the District of Columbia. For years after 2004, the state death tax is deducted from the taxable estate in calculating the federal estate tax.

Entering Data

• Calculation Choose an Estate Tax or Gift Tax calculation.
• Death Date (Gift Date) Enter the date that the decedent died for an estate tax calculation. Enter the date the gift is made for a gift tax calculation. Valid Year inputs are 2000 through 2050. If the year entered is 2010, then there is a choice between no estate tax and a 35% rate.
• Sunset in 2026? Indicate how future estate tax calculations will be handled.
• Tentative Taxable Estate (Taxable Gift) Enter the value of the Tentative Taxable Estate (the net estate after all deductions other than the section 2057 deduction) for an estate tax calculation. Enter the Taxable Gift for a gift tax calculation.
• §2057 (QFOBI) Deduction Enter the QFOBI deduction. (This entry field is available only for Estate Tax calculations and only for years before 2004.)
• Pre-1977 Taxable Gifts Enter the amount of Taxable Gifts made before 1977.
• Adj. Taxable Gifts (After ’76) Enter the amount of any taxable gifts made previously. If there are no prior Adjusted Taxable Gifts, the tentative tax base will be equal to the Taxable Estate. The software does not handle gifts between 9/8/1976 and 1/1/1977 that used the specific exemption. When more than $500,000 in taxable gifts were made before 2010, the Prior Gifts model should be used to calculate values to be used for this input.
• Unified Credit Used by Gifts Enter the amount of unified credit used by prior gifts. If there are no prior gifts, then no unified credit has been used. For years after 2009, the amount of unified credit used must be recalculated using current tax rates. Click the computer icon next to this field to calculate the maximum unified credit used by prior gifts, and see the separate “Prior Gifts” calculator for more detailed help. When more than $500,000 in taxable gifts were made before 2010, the Prior Gifts model should be used to calculate values to be used for this input. You should not click the computer icon if you have already transferred values from the Prior Gifts model and the “Using Prior Gifts Model and Credit Used” message is displayed at the bottom of the input section for the Estate Tax model.
• Out-Of-State Property If the federal taxable estate includes real or tangible property which is outside of the decedent’s domicile and so not subject to tax in the decedent’s domicile, enter the total value of that property here. The program will calculate the tax on the decedent’s entire estate and then reduce the tax in proportion to the value of the out-of-state property. If the value of the property should be entirely excluded from state death tax calculations, enter the value of the property in the State Adjustment described below.
• Estate Tax Calculations In 2010, the user can select the 35% rate or No Estate Tax.
• Spousal Unused Exclusion Enter the amount of any “deceased spousal unused exclusion amount” to which the decedent/donor is entitled by reason of the death of a spouse after 2010 whose estate tax return did not use up the full unified credit exclusion amount. Click on the computer icon to the left of the entry field to calculate the maximum exclusion amount for the year of the spouse’s death, taking into account the inflation rate entered for the exclusion.
• Inflation Rate for Exclusion Enter the rate of inflation to be applied to increase the unified credit exclusion amount in future years.
• Calculate State Death Tax When this box is checked, the program will calculate the state death tax and (for years after 2004) deduct that tax from the federal taxable estate. Uncheck this box to enter a different amount of state death tax payable.
• State Select the state for which the state death tax should be calculated. Click the plus symbol to the left of the state selection to set a default state for this screen and the Projection of Estate Tax screen.
• Recipient Class This field will appear if a state has an inheritance tax with different rates for different classes of beneficiaries. Classes are defined differently by each state, so click on the “+” button to see the possible classes for the selected state, and then select the class receiving the estate and click on “Save” to enter the number of the class in the field to the right.
• Ret. Plans Excluded This input will appear when you select a state that excludes retirement plans from the taxable estate for the inheritance tax calculation.
• Insurance Excluded This input will appear when you select a state that excludes insurance proceeds from the taxable estate for the inheritance tax calculation.
• State Adjustment Enter any amount by which the state taxable estate will be more than, or less than, the federal taxable estate. For example, if the selected state does not tax farmland, the value of the farmland might be entered as a negative number, or if the state imposes a tax on lifetime gifts within a short time of death, those gifts might be entered as a positive number.
• QTIP Adjustment This input will appear when you select a state that can make a qualified terminable interest property (“QTIP”) election under I.R.C. Section 2056(b)(7) for the purpose of the state estate tax that is different from the election made for federal estate tax purposes. Enter the value of any trust or property which is included in the decedent’s gross estate for state death tax purposes but not federal estate tax purposes because of a state-specific QTIP election. Because the value of the state-specific QTIP property is not included in the federal gross estate, the state death tax attributable to that property is not deductible under IRC section 2058.
• Gift Tax Calculation Click the “Max Gift for $x Gift Tax” to calculate the largest gift that can be made based on the desired gift tax entered.

Results

The Summary Tab displays the amount of federal gift tax that is payable if a lifetime gift is made, or the federal estate taxes that are payable if a transfer at death is made. The results also show the net estate remaining and the percent of the estate that is lost to the federal gift tax and federal estate tax.

For years after 2004, the state death tax is deducted from the taxable estate in calculating the federal estate tax, but the deduction is only for the tax paid “in respect of any property included in the gross estate.” If there is a “QTIP Adjustment” entered for a state that allows a qualified terminable interest property election separate from the federal election (which would include Connecticut, Illinois, Maine, Maryland, Massachusetts, Minnesota, Oregon, Rhode Island, and Washington), so that there is QTIP property that is subject to the state death tax but not the federal estate tax, the deduction is proportionate to the QTIP adjustment as a percentage of the taxable estate for the state death tax.

For simplicity sake, not all possible credits are calculated in the calculation’s results. The purpose of this calculation is to produce a quick, accurate estimate of the potential federal estate or gift tax.

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