 Hello and welcome to the session. This is Professor Farhad in the session. We would look at gift tax Typically this topic is covered in a corporate income tax course The CPA exam regulation section as well as the enrolled agent exam as always I would like to remind you to connect with me on LinkedIn if you haven't done so YouTube is where you would need to subscribe I have 1600 plus Accounting auditing tax and finance lectures this topic will go under my income tax course and It will go under my CPA Examination as always I would like to remind you please like my lectures if you like them like them share them put them in Playlist it doesn't cost you anything if they benefit you they might benefit other people as well So share the wealth and please connect with me on Instagram on my website You will have access to additional resources such as PowerPoint slides through false multiple choice if you're studying for your CPA 2000 plus CPA questions. I strongly suggest you check out my website So let's talk about the transfer tax, which is the gift tax falls under the transfer tax Now we have two types of transfer tax We have the estate tax and we have the gift tax So we're gonna be covering the gift tax in this session and at some point in the near future I will cover the estate tax. What is the estate tax? It's imposed upon the decedent's entire estate and that's the tax on the right to press to pass property at Death, so here what's happening the person passed away died and now they're passing the property to their Kids grandkids whoever it's after death the gift tax is called lifetime transfer or inter vivos is Is a gift tax where you give someone money and you don't expect anything in return? That's a gift tax who pays the gift tax the donor that generous person that gave you the gift is responsible for paying the taxes If you get the gift good for you You don't have to pay taxes But the person that gave you the gift is responsible for that now the person that pays they gave you the gift They have an exclusion on the first 15,000 of this number 15,000 I'm doing this recording in the spring of 2020 so this number might change if you're watching this in 2021 2022 2025 I don't know how long this YouTube will be available, but the point is There's an annual Execution and this annual execution changes on a regular basis due to inflation and other factors So the first 15,000 of gifts made to any person during a calendar year is Execluded in determining the total amount of the gift for the year simply put I can walk on the street And give every person 15,000 dollar and I don't have to worry about the gift tax I can give each of my students 15,000 dollar if you're listening if I can afford to give you 15,000 I can give you 15,000 and there's no Consequences tax consequences to me and obviously there is no consequences to you because you're the person that's receiving Okay, so the first 15,000 is excluded a Present interest the gift has to be a present interest a present interest mean I'm giving you unrestricted right to the immediate use possession or enjoyment of the property or the income So if I'm giving you 15,000 I'm giving you that 15,000 and you can do anything with it I'm not putting any conditions on you. I am not telling you how to use it. I'm not giving you any Any restrictions that has to be present interest now spouses may elect to use something called a split gift How does it work? Well the split gift here? It's gonna give you not 28. It's gonna give you 30,000 I should have updated this it's gonna give you 30,000 so simply put you could give up to 30,000 to each dough need during a gear even if the assets were only owned by one person so Myself myself and my wife could give that's assumed from my bank account. I can give 30,000 I can say this is from my from myself and from my wife and Up to 30,000 is excluded once again those number will change it allow gift to be treated as being made by half by each spouse That's eliminated any transferred tax on the gift We'll just make the gift higher if you are basically married. Okay, let's take a look at few examples just to see how this work Hey, Laura makes the following cash gifts. She gave 8,000 to Rita. No problem whatsoever 8,000 is less than That's less than 15. I don't have to worry about this gift in 18,000 to Maureen. Well, hold on a second of the this 18,000 15,000 is executed is executed by the annual Execlusion so the the first 15,000 now my pen is acting up. Sorry about that. So the first 15,000 I don't have to worry anything about What's left is Three thousand that three thousand I have to worry about the gift in a sense that I have to worry about the gift tax And really you're gonna see later that three thousand It's not gonna have any tax consequences for me unless my gift over the years exceeds a certain amount and that amount is pretty high It's in the millions of dollars, which we'll see in a moment But the point is I don't have to worry about this 3000 for now so Laura may claim an act an annual exclusion of 8,000 with respect to Rita and 15,000 with respect to Maureen. So what's gonna happen to the that additional three thousand that remainder that three thousand dollar She's gonna have to worry about in a sense that she's gonna have to keep track of up until Her total gift over her lifetime exceed a certain amount, which is again. It's in the million 11 million plus now we have something called a future interest gift Well, what is a future interest gift future interest gift is deemed as an interest that will be that that will come into being at Some future date. So I promise you something but you can't have access to it until I die. Well, that's a future promise That's a future interest gift. So what does that mean? It means It's not really a gift. It's a future gift. Okay, so an example of future gift including the rights The rights such as remain remainder interest that are commonly encountered when property is transferred to a truck So I transferred a property to a trust but you can't really use it until I die or Until someone else's that I gave it to someone and someone else's die. Then when that person dies, then you can use it Okay, so let's take a look at an example by a lifetime gift Ron transfers property to a trust with a life estate with a life estate With income payable annually To June so he gave the gift to June Let's look at June here He gave the gift to June and the remainder upon June's death it goes to Albert So Albert basically gets the remainder after June passes away So Ron made two gifts at this point. They made two gifts. What are the two gift one? That's a present gift to June. He gave something to June right now And once June passes away, it passes to Albert So Albert remainder what Albert gets is what's called the remainder is a future interest and does not qualify for this 15,000 exclusion basically it's not executed. Okay, so we need to understand that the gift has to be Present okay requirement for a gift. There are certain requirements that we need to be aware of what we need to be aware Of when it comes to a gift. Okay, first the donor is competent To make the gift so the donor knows what they're doing knows what they're doing And they might test you on this on the CPA exam just to make sure are you familiar with? Are you familiar with the requirements of a gift the don't need is capable of? Receiving and possessing the property so the donor is again think of the donor as the rich person That's giving the gift the dough knee is the person that's receiving the gift So the donor has to be competent and the person receiving is capable of receiving that gift There is a donative intent of the donor. So the donor doesn't expect anything in return I'm giving you this gift and guess what it's yours. You don't have to give me anything back You don't have to provide any service for me. You don't have to give me any other asset in return Actual or constructive delivery to the dough knee or the dough knee representative Well, I gave you the gift but I have to deliver it physically deliver it. It's not okay I promise you I have to give it to you either constructively put it in your name and give you Unrestrictive access and in your bank in a bank account or I have to physically give you the money or whatever that property is And accepting by the gift by the dough knee and who really reject the gift I mean, there is it there is a rule where if you reject the gift you have to do a disclaimer But we're not gonna talk about that. Okay now a transfer is not a gift Okay, if it's considered incomplete or conditional so sometime The gift is incomplete or conditional what is incomplete? Basically the donor Put the asset in a trust and that trust is revocable. So the trust is revocable means For any reason for any reason the person that gave you the gift they can take it back. They can cancel it It's revocable. Well, guess what if it's revocable. It means they did not really give you a gift It's because it's revocable. Also if the gift is conditional, for example, they want you to graduate from Harvard That's when you get the gift Well, that's not really a gift because that's conditional if they need you to graduate in order to get the gift and you haven't graduated yet That's the assumption here. Then there is no gift involved. Also, what's not considered a gift any money To political parties whether you're given money to the Republican Party or to the Democrat. That's not a gift Also payment made directly to agitational institutions. Let's assume they pay your tuition or medical care Or they pay your hospital bill. That's also not considered a gift. That's executed from a gift That's not considered the gift as far as we're concerned. So let's take a look at the gift at the gift at the gift formula first we start with Some a fair value of the transfer that are subject to the federal gift tax So we include all the gift that you provided then we deduct from the gift claim of The annual execution once again, it happens to be 15,000 when I am preparing this recording So any person that you gave up to 15,000 we can so so notice we include the 15,000 first then we deduct it out Then we deduct any charitable contribution and marital deduction simply put husband and wife can give gifts to each other as much as possible So what do we do with those with the dog them? So the annual execution and those then we have the taxable gift for the current here Whatever that taxable gift happens to be for the current here After we deduct the exclusion then this year gift tax 40% of the taxable gift We're gonna multiply it by 40% then we're gonna subtract something called the unified transfer tax credit Then the government says you have a credit and what's that credit? We're gonna see in a moment You have a credit that if you know, for example, your tax bill is 100,000 well, you have a credit up to a point we're gonna talk about the unified transfer credit and if you have anything do after the unit unified transfer credit Then that's your gift do now. Here's what you need to know. Here's what you need to know in 2019 up to 11,400,000 is x a clue that simply put if you came to this point in your computation If you came to this point in your computation and And that number is 11,400,000 your taxable gift for the current here now Well, let me put put it this way your taxable gift so far not your taxable gift for the year because the taxable gift is Accumulative so during your lifetime as long as you haven't made 11,400,000 of gifts Guess what the credit it's gonna wipe out your tax So when does the gift tax kick in the gift tax kick in after you have contributed? 11.4 million over your lifetime. So it doesn't kick in until someone with a lot of money Contributed a lot of money over their lifetime over their lifetime So this is the taxable gift for the current period now You'll take this taxable gift then you add to it You add to it prior gifts prior gifts And once the prior gift and the current gifts exceed 11.4 million Then your tax will kick in because up to 11,400,000 the government gives you a credit Credit for all those taxes And this is a computation This is the uniform transfer tax and here notice it's for gifts and For that why gift and tax because in the next session and look at the estate tax the gift tax and the estate Tax they're basically the same because that 11 million 400,000 is for the gifts and if you die They will include that up to 11 million 400,000 So basically the same tax and same tax in one sense or another and once you exceed that number Then you have to determine your taxes based on the schedule so the best way to illustrate this is to look at an example in 2019 Janet makes a taxable gift of six million so he gave six million and That was her first taxable gift that she ever made guess what she will file a return saying I made a gift of six million But she doesn't own any taxes. Why because the government says you have up to 11 million 400,000 she's she's really kind of 50% little bit over 50% halfway through in 2019 Sanjay makes a taxable gift of two million and prior year Sanjay taxable gift total 10 Hold on a second. So you're telling me now You made in prior year. You made a gift of two Million and now you made another gift of 10 million. Guess what now you must you? exceeded the 11.4 million so your total gift are 12 million total gift are 12 million You are Allowed 11.4 it means now you're gonna have to pay some taxes and the taxes will apply to the 600,000 You come up up here and you'd say okay mine is 600,000 600,000 falls in this bracket So you have to pay 155,800 Plus 35 percent over the amount of a hundred of 500,000. What does that mean? It means an additional 37,000. So you're gonna pay 155 plus 37,000 they made the math very easy plus 37,000 okay, so that's what let's just do the math just to kind of get it out of the way 155 155,000 plus 155,800 plus 37. I'm gonna add 800 here. So 192,800 so that will be your tax now You have to pay gift tax of 192,800. Okay So again, it doesn't kick in until you reach a certain point What about the 529 college savings plan? What is that 529 college savings plan? Simply put the US government says if you put money away For someone your kids your grandkids for college education We're gonna give you a tax credit now. How does the tax credit work? It doesn't give you a deduction right now So it doesn't give you what I when I said tax credit it doesn't mean you're gonna get the deduction now So no upfront federal income tax deduction is allowed. So it doesn't give you upfront. So what's the benefit? Guess what? Let's assume you invested the money in Tesla or an Apple or in some Some stock guess what the income earned by the fund Accumulate tax-free. So so although you don't get a tax credit But when you earned income on the money that you invested And if as long as you distribute this money for educational purposes, then it's tax free So that's the benefit that you will get Also, there's a special provision where you can upload money up front It allows the donor to enjoy a gift tax advantage by using five years of annual exclusion simply put You remember the annual exclusion is 15,000 What they're saying is you could put five times 15,000 up front and we consider this an annual Exclusion if you're putting that money in a 529 college savings plan But you could do this once every five years so you can upload that money up front and guess what? These college plans are not included in your gross estate. So when you pass away and we'll talk about the gross estate later You don't have to worry about that. Let's take a look at an example Let's assume Trevor and Audrey would like to start building a college education fund for their 10-year-old granddaughter Lonnie Trevor contributed 150 to the designated career of their state 529 plan so they they went into their bank and they told their banker Let's open a 529 plan for Lonnie and we would like to write a check for 150,000. Well What they would do now they're gonna allow they're gonna They're gonna they're gonna elect to split the gift. So basically they're both of them making the gift By electing to split the gift and using a five annual execution and they want to take this exclusion. So guess what? It's now it's 15,000. Remember the execution is 15,000 Now we're talking about two individuals because they elected to split the gift So their execution per year is 30,000 and they can front load Up to five years. What does that gonna give us? That's gonna give us one hundred and fifty thousand So the whole gift the whole gift of one hundred and fifty thousand is Execluded. Okay, so they make this Executioner bail in mind in the next five years. They cannot give any money to Lonnie and say it's executed anymore They allow you to upload it up front Okay, so they allow you to upload it up front but going forward Lonnie cannot gift cannot get any money from their grandparents What what happened in if in terms of divorce a property settlement and divorce went to individual separate Interest made under the terms of the written agreement Is deemed to have adequate consideration simply put that's not gift. So when they separate when husband and wife separate That's not subject to a gift That's that's exempt from the federal gift gift tax because the assumption is You get enough consideration now. Hopefully not hopefully but most likely you or not most likely but if you haven't learned about Amazon CEO Jeff Bezos when he divorced his wife when he divorced his wife She got a lot of money She got 38 billion dollar in divorce. Well, what's that considered? that's considered Adequate that's considered adequate Jeff Bezos gave his ex-wife basically McKenzie's Bezos he gave her 38 billion and that's not considered a gift because the reason the argument was that his wife I mean, it's it's funny But it's it's really it's it's good to think about it or to kind of think about it in a sense to know Why because the assumption is McKenzie was working to support the Jeff when he was starting Amazon So basically McKenzie said look I I I helped you create Amazon and now you're gonna pay me for that So it's I'm getting I need to get my adequate consideration. So therefore it's not really a gift So that's what we're saying here and what they're saying is there is there is a limit the time limit on one that Needs to happen. You don't have to worry about this same thing with child support Child support is approved by a divorce decree. They're not considered a gift now in the next session What we need to do we need to take a look at maybe one two or three exercises that are Simulations or quasi CPA simulations to illustrate this concept of tax gift this topic is covered on the CPA exam I would like to remind you if you like my lectures, please like them Click on the like button share them. Okay, and if you're studying for your CPA exam Take a look at my website This is a long-term investment when you study for your exam. You are making a long-term investment make that investment It's worth it study hard for your for your income tax course. It's worth it. Good luck