Kathleen ReynoldsKeymasterOctober 18, 2022 at 5:31 pmPost count: 428
This utility calculates the unified credit allowed by prior gifts, as required by IRC section 2505(a)(2), and the gift tax payable on adjusted taxable gifts that are included in the tentative tax base for federal estate tax purposes, as required by IRC section 2001(b)(2) and (g). As will be explained below, these results are needed for federal estate and gift tax calculations when more than $500,000 of taxable gifts were made before 2010 because taxpayers can no longer rely on the amounts reported on the gift tax returns that were filed for those prior gifts.
Under the unified (and progressive) gift and estate tax system created by the Tax Reform Act of 1976, gift tax calculations are cumulative, so that each taxable gift during the taxpayer’s lifetime pushes the taxpayer into higher gift tax rates. Similarly, gifts made during lifetime are added to the taxable estate in calculating the estate tax due at death, and so lifetime gifts pushes the taxpayer’s estate into higher estate tax brackets.
A “Unified credit” against the gift tax and estate tax provides an exclusion for gifts up to a certain total amount during lifetime, or an exclusion for a taxable estate of up to a certain amount.
Under this system, certain problems can arise when a taxable gift is reported during lifetime at one tax rate, and tax is paid (or unified credit is used) at that tax rate, but the tax rate is later changed. IRC section 2001(b)(2) has always addressed part of the problem by providing that the gift tax that is considered to have been payable on the taxable gifts that are included in the estate tax calculation must be redetermined using the tax rates in effect at the decedent’s death, and not the tax rates in effect at the time the gifts were made. So, for example, if a decedent had made a taxable gift and paid a tax of 54%, but the tax rate were only 35% at the decedent’s death, the inclusion of the gift in the estate tax calculation would add 35% to the tentative tax and section 2001(b)(2) would subtract that same 35% from the tentative tax. In that way, the inclusion of the gift in the estate tax calculation neither increases nor decreases the estate tax payable, but simply insures that the taxable estate is taxed at the intended rate.
A new problem arose in 2010, when the reduction in the top gift tax rate from 45% to 35% actually changed the amount of the credit allowed. When the top gift tax rate was 45%, the credit was $345,800, which is what the tax would be on $1,000,000. When the top tax rate became 35%, the tax on $1,000,000 became $330,800, which became the credit amount in 2010. If a taxpayer had made gifts of $900,000 in 2009, when the top tax rate was 45%, and them made a gift of $100,000 in 2010, intending to use up the rest of the $1,000,000 exclusion, there might be a tax of $11,000, because the 2009 gift would have used up $306,800 of credit, leaving only $24,000 of credit in 2010, while the $100,000 gift would result in a tax of $35,000.
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 therefore made the following changes:
- IRC section 2001(b)(2) has been amended, and a new subsection 2001(g) has been added, to require that, in calculating the gift tax payable on the adjusted taxable gifts that are included in the estate tax calculation, the tax rates that are in effect at the decedent’s death must be applied both in calculating the tentative tax on the gifts and in calculating the credit allowed and the tax payable on those gifts.
- IRC section 2502(a)(2) has been amended to require that the “credit allowed” for gifts in previous years must be redetermined using the rates in effect for the current year and not the rates in effect in the year in which the gifts were made.
The program makes these calculations by allowing the user to enter the amounts of the taxable gifts made each year, and then recalculating both the unified credit allowed for those gifts and the gift tax payable on those gifts by applying the tax rates in effect at the time of the decedent’s death or, for a gift tax calculation, the rates in effect in the year the gift is made. The results can then be applied in calculating the gift tax or estate tax currently payable.
The program has been updated for the American Taxpayer Relief Act of 2012.
- Tax Calculation Select “Estate” to create a Line 7 Worksheet for a federal estate tax return (Form 706) or “Gift” to create a Worksheet for Schedule B, Column C (Credit Allowable for Prior Periods) for a federal gift tax return (Form 709). Also, use Gift when the Prior Gifts model will be used to transfer values to the Estate model.
- Year Enter the year that the decedent died for an estate tax calculation. Enter the year the gift is made for a gift tax calculation. Valid inputs are 2010 through 2050.
- Sunset in 2026? Selects how future estate calculations are handled.
- Pre-1977 Taxable Gifts Enter the amount of taxable gifts made before 1977.
- Transfer Values to Estate Model Check this input and click the Estate Model button to transfer values to the Estate model. This is particularly important for cases where taxable gifts prior to 2010 exceed $500,000.
- Inflation Rate for Exclusion Enter the rate of inflation to be applied to increase the unified credit exclusion amount in future years.
- 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.
- Year of Spousal Death Enter the year that the decedent’s/donor’s spouse died if a deceased spousal unused exclusion amount is being claimed. Valid inputs are 2011 through 2050.
- Taxable Gifts in Year of Spousal Death and before Death Enter the amount of taxable gifts (if any) that were made in the same year that the spouse died for which a deceased spousal unused exclusion amount is being claimed and were made before (and not after) the death of the spouse. This amount should be less than or equal to the total taxable gifts entered for that year.
- List of Taxable Gifts after 1976 Click on the Edit button to enter the total amount of taxable gifts made in each year after 1976. Gifts in any one year can also be deleted without first clicking on the edit button by clicking on the year to highlight that year and then clicking on the Delete button.
The table of results shows the taxable gifts before 1977 and for each year for which taxable gifts were entered after 1976. The format of the table depends on whether the calculation is “Gift” or “Estate,” with the gift table following the format of the Form 709 “Worksheet for Schedule B, Column C (Credit Allowable for Prior Periods)” that is found in the instructions for Form 709, and the estate table following the format of the Form 706 “Line 7 Worksheet” that is found in the instructions for Form 706.
The gift table shows the following columns:
- The taxable gifts entered for that year.
- The total of the taxable gifts for prior periods.
- The cumulative taxable gifts, which is the sum of the gifts for that year and for prior years.
- The tentative tax on the prior gifts (#2, above) calculated using current tax rates.
- The tentative tax on the total cumulative taxable gifts (#3, above).
- The net tax on the gifts for that year, which is the difference between the tax on the prior gifts (#4) and the tax on the total cumulative gifts (#5).
- The maximum unified credit allowable for that year, calculated using current tax rates.
- The total unified credit used in prior periods.
- The remaining credit available for that year, which is the difference between the maximum allowable (#7) and the credit previously used (#8).
- The credit allowable for that year, which is the lesser of the gift tax for that year (#6) and the credit allowable (#9).
- The gift tax payable for each of the year’s gifts, which is the difference (if any) between the tax on that year’s gifts (#6) and the credit allowable for the year (#10).
Totals are shown for the unified credit allowable for all years, and for the gift tax payable for all years.
When there are taxable gifts in a single year both before and after the death of a spouse resulting in a deceased spousal unused exclusion amount (i.e., the amount entered for “Taxble Gifts in Year of Spousal Death and before Death” is greater than zero and less than the total taxable gifts entered for that year), there will be two lines for that year, one showing the taxable gifts made before the spousal death and the other showing the taxable gifts made after the spousal death.
The total of the ‘Credit Allowable’ should be entered as the ‘Unified Credit Used by Gifts’ on the Gift and Estate Tax Computation screen, as well as similar input fields in the Marital Deduction Optimization and Tax on a Net Gift screens. If a gift tax return is being prepared, that total should be entered on line 8 (‘Enter the unified credit against tax allowable for all prior periods’) of Form 709 (Rev. 2010).
The estate table shows the following rows for each year for which taxable gifts have been entered:
- Taxable Gifts for Applicable Period.
- Taxable Gifts for Prior Periods.
- Cumulative Taxable Gifts Including Applicable Period (add Row (b) and Row (c)).
- Tax at Date of Death Rates for Prior Gifts (from Row (c)).
- Tax at Date of Death Rates for Cumulative Gifts including Applicable Period (from Row (d)).
- Tax at Date of Death Rates for Gifts in Applicable Period (subtract Row (e) from Row (f)).
- Total DSUE applied from Prior Periods and Applicable Period (from Line 2 of Schedule C of Applicable Period Form 709).
- Basic Exclusion for Applicable Period (Enter the amount from the Table of Basic Exclusion Amounts).
- Basic Exclusion amount plus Total DSUE applied in prior periods and applicable period (add Row (h) and Row (i)).
- Maximum Applicable Credit amount based on Row (j) (Using Table A-Unified Rate Schedule).
- Applicable Credit amount used in Prior Periods (add Row (l) and Row (n) from prior Period).
- Available Credit in Applicable period (subtract Row (l) from Row (k)).
- Credit Allowable (lesser of Row (g) or Row (m)).
- Tax paid or payable at Date of Death rates for Applicable Period (subtract Row (n) from Row (g)).
- Tax on Cumulative Gifts less tax paid or payable for Applicable Period (subtract Row (o) from Row (f)).
- Cumulative Taxable Gifts less Gifts in the Applicable Period on which tax was paid or payable based on Row (p) (Using the Taxable Gift Amount Table from the instructions to Form 706).
- Gifts in the Applicable Period on which tax was payable (subtract Row (q) from Row (d)).
- And, at the bottom, the total gift taxes payable on gifts after 1976 ( sum of amounts in Row (o)).
The total of the ‘Gift Tax Payable’ should be entered as the ‘Gift Tax Paid on Adjusted Taxable Gifts’ on the Bypass Trust Computation screen or the ‘Post-1976 Gift Tax Paid’ on the Determination of Cash Requirements screen. If an estate tax return is being prepared, that total should be entered on line 7 (‘Total gift tax paid or payable with respect to gifts made by the decedent after December 31, 1976’) of Form 706 (Rev. 9/09).
For the sake of simplicity, the program does not take into account the possible reduction in the unified credit for gifts made after September 8, 1976, and before January 1, 1977, and does not take into account the possibility of a credit for foreign gift taxes.
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