Question Of The Week

TCP: Gift Tax Exclusions

During the current tax year, a married taxpayer made the following gratuitous transfers:

Funds paid directly to a college to cover a friend's tuition ($30,000) and room and board ($19,000) expenses	$49,000
Cash given to a grandchild (spousal gift-splitting elected)	25,000
Donation to a local political candidate's campaign	18,000
Cash given to spouse	20,000

Assuming that this year's annual gift tax exclusion is $17,000, what amount of taxable gifts has the taxpayer made this year?

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		A. $0
		B. $2,000
		C. $3,000
		D. $10,000

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Explanation

A direct or indirect transfer to an individual is considered a gift if full consideration (measured in money or money's worth) is not received in return. However, some transfers are not subject to gift tax and therefore are deemed excludable gifts. This means the transfer is not reportable and not qualified for the annual gift tax exclusion or lifetime unified transfer tax exemption. Gifts subject to tax are first offset by the statutory annual gift tax exclusion per donee (ie, $17,000 for 2023, or $34,000 per married couple if spouses are gift-splitting).

Exclusions or deductions permitted from gross gifts include:

Education exclusion amounts paid directly to an institution for tuition and fees (amounts for room and board are not included)
Political contributions, which are excluded without limit
Marital gifts of non-terminable (ie, outright) interests, which are deductible without limit
Statutory annual gift tax exclusion per donee (double if spousal gift-splitting elected)

None of the exclusions or deductions require that a transfer be made to or on behalf of a relative of the donor (Choices A, C, and D).

In this scenario, the taxable gift amount is $2,000, calculated as follows:

Gross gifts ($49,000 + $25,000 + $18,000 + $20,000)	$112,000
Less:
Education exclusion (tuition only)	(30,000)
Political donation	(18,000)
Cash given to spouse	(20,000)
Statutory annual exclusion per donee allowed against $19,000 room and board	(17,000)
Statutory annual gift tax exclusion per donee for $25,000* given to grandchild (spousal gift-splitting)	(25,000)
Taxable gifts	$2,000
*Potential $34,000 exclusion cannot exceed amount of the gift

Things to remember:
Some transfers are not subject to gift tax (eg, gifts to spouse, tuition paid to educational institutions, political donations) and, therefore, are deemed excludable gifts (ie, not reportable and not qualified for the annual gift tax exclusion). Gifts subject to taxation are entitled to a statutory annual gift tax exclusion.

Lecture References :

TCP 3.01 : Gift taxation compliance and planning

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