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TCP CPA Practice Questions Explained: Calculating Taxable Gifts

Calculating Taxable Gifts

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In this video, we walk through 5 TCP practice teaching about calculating taxable gifts. These questions are from TCP content area 1 on the AICPA CPA exam blueprints: Tax Compliance and Planning for Individuals and Personal Financial Planning.

The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.

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Calculating Taxable Gifts

Gift Valuation

When a gift is made, the value of the gift is determined based on its type. Property, including stocks, real estate, or personal items, is valued at its fair market value (FMV) at the time of the gift. Cash gifts are straightforward; they are valued at the amount of cash given.

Example: If Ellen gifts her nephew a car she purchased for $20,000 that is now worth $25,000, the gift is valued at $25,000 for tax purposes. Similarly, if she gives her niece $10,000 in cash, the gift value is exactly $10,000.

Tax-Exempt Gifts

Certain types of gifts are exempt from gift tax, regardless of their value. These include donations to qualifying political organizations and charities. Additionally, payments made directly to educational institutions for someone else’s tuition or to medical facilities for someone’s medical bills are not considered taxable gifts.

Example: Mark pays $30,000 directly to a university for his granddaughter’s annual tuition and $15,000 to a hospital for his friend’s medical expenses. Neither of these payments are considered taxable gifts.

Exclusions and Splitting

The IRS allows an annual gift tax exclusion per person, which is adjusted periodically for inflation. For example, in 2023, this exclusion was $16,000 per recipient. Married couples can combine their exclusions through gift splitting to jointly gift an amount double the individual exclusion without incurring gift tax. Gifts between spouses are unlimited and not subject to gift tax due to the unlimited marital deduction.

Example: Sara and Joe, a married couple, decide to gift their son $30,000 to help with a down payment on a house. They can use gift splitting to each use their $16,000 exclusion, covering $32,000 of the gift completely tax-free.

Joint Tenancy Gifts

When property is transferred into joint tenancy, half of the property’s FMV is considered a gift from the original owner to the new joint tenant. This rule applies unless the joint tenant is the spouse of the original owner, in which case the gift is not taxable.

Example: If Jenny adds her brother as a joint tenant to her property valued at $200,000, she has effectively made a taxable gift of $100,000 to her brother, representing half the value of the property.

Related Party Transactions

Loans given without interest or sales made below the fair market value to related parties can trigger gift tax implications. For loans, the IRS imputes interest at the applicable federal rate (AFR), treating the forgone interest as a gift. For sales, the difference between the FMV and the sales price is treated as a gift.

Example: Tom loans his son $50,000 interest-free to start a business. With an AFR of 2%, the IRS considers Tom to be giving an annual gift of $1,000 (2% of $50,000) in forgone interest. Similarly, if Tom sells a piece of property to his daughter worth $100,000 for $70,000, he has made a taxable gift of $30,000, the difference between the FMV and the sales price.

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