the estate tax versus the gift tax

[unblock]

consider the following two scenarios, viewed through the eyes of a banana republican:

(1) a divorced father's teenage kid just passes the driving test. proud parent has been working overtime and give the kid a new car. they don't know much about cars and don't feel comfortable with a used car, so they buy a cheap new car. hard to find one for under, say, $15,000. so they that's what they get.

unfortunately for them, $10,000 is the limit anyone can gift to anyone else tax-free. the excess $5,000 is taxable income to the kid, or, assuming the kid is declared as a dependent on the mother's return, it is taxable income to the mother.

divorced mother can't swing the extra tax bill, and dad's tapped out, so they wind up having to sell the car at a big loss to pay the tax bill.

(yes, there are legal ways to avoid taxation here, but they require research, arcane knowledge, or, most likely, paying a tax professional, which may not be worthwhile.)

(2) a divorced father dies, and bequeaths to his only child (again, a teenager living with the ex-wife) stock, real estate, and art holdings, as well as several rare and exotic cars, all worth about $50,000,000. the assets have appreciated in value over 300% since purchased some of them many years ago, some of them quite recently.

tax-free, and you don't even have to see a tax professional about it. the stock appreciation will never be taxed, as the child's "cost basis" is the market value when transferred from the estate, not originally purchased.


in the banana republican world, this is completely fair and in fact, anything else is brutally unfair to the poor child in scenario two. somehow, banana republican convinced america that trust fund babies would have to sell family farms to pay estate taxes (they looked hard, but found exactly ZERO examples of this), but they don't give a rat's ass about scenario (1).

[Launch Pad]

1. Solution for scenerio 1

Senario 1 is simple to get around.

Have the kid open a bank account under his or her name. Fund the account with $8000.00 one day and $7000.00 the next. Then have him go buy the car with his money. I believe this will work.

Scenerio 2 would take a tax professional to sort out.

[pitohui]

5. structuring is a federal offense

never fund a bank acct w. $8K one day & 7K the next

that is a crime called structuring

the bank will file a suspicious transactions report because you broke it up like that

go ahead & deposit the entire $15K by check from dad to child

the original poster is completely mistaken, no gift tax is owed by the child on $15,000 and the father would have to have given away a great deal more money than that to owe any gift tax himself

the original poster needs a tax attorney because he doesn't understand gift tax & is prob. unnecessarily stressing himself abt taxes he need not pay

[unblock]

6. as long as you gift over the limit in the same tax year, it doesn't matter

gifting in two payments or 365 payments, it doesn't matter.
gift over $10,000 to any one person, and you get hit with taxes.

(noting other posts, my info on the $$ limit might be a bit outdated, maybe it's $11,000 or $12,000 nowadays. for married couples, both can make gifts, so in effect the limit is double. but it's not millions.

[unblock]

7. according to www.irs.gov, the limit is $11,000

[GreenPartyVoter]

2. I have links to sites like

Responsible wealth and Sensible Priorities on my site, though I imagine you are already aware of them. :)

http://timeforachange.bluelemur.com/liberalchristians.htm

[pitohui]

3. you don't understand the gift tax at all

you are completely wrong, there is no scenario #1, because gift & estate tax are linked

go to irs.gov to read their brochure on gift tax

go to irs.gov to find out how much you can gift in a year w.out filling out a form, it was $11,000 last time i looked, might be $12,000

whatever

let's say i give my friend a $15,000 car

i do have to fill out the form, but that's all it is, a form keeping track of how many such gifts i give

back in the day, if all of my gifts total $300,000, then and only then do I -- THE GIVER OF THE GIFT -- pay the gift tax

the recipient of the gift doesn't pay the gift tax

THE GIVER OF THE GIFT PAYS

if i'm giving away hundreds of thousands of bucks as gifts, sorry, i can afford to pay some tax

anyway, i think it's up to around $2 million now

it tracks w. the estate tax, if i give away too much money and then immediately die, yeah, the gift tax comes out of my estate

because otherwise rich people on their deathbed would give away everything & never pay a dime of tax

as it is, the gifts are calculated as part of the estate until three yrs have passed from date of gift

if you die too soon, again, there is an estate tax due on the gift

BUT THE RECIPIENT DOESN"T PAY...THE ESTATE PAYS

how much $$$ do dead ppl need anyway

you can't take it w. you

by the way i can give ANY amount of money as a gift if it is for medical purposes as long as i give it directly to the hospital, doctor, or medical bank acct & never pay ANY gift tax...so if you are raising a lot of $$$ for medical expenses, you can save your donor some $$$ by setting up the medical donation in a fashion so that it goes straight to the docs & is never actually in yr hands

whew

[unblock]

8. ok, the donor pays (generally), but you're missing the point

the point is that piddling little gifts of just over $11,000 are taxed, yet gifts on death of tens of millions are tax-free. and banana republicans think that's fair and anything else isn't.

[Yupster]

9. unblock -- you just don't understand

how the gift tax works.

Each person on their death has $ 1.5 million in gifts they can make as an inheritance before the inheritance tax kicks in.

Before death you may gift $ 11,000 per year to as many people as you like but here's the part I don't think you understand.

If you go over the $ 11,000 per year to any one person in any one year, then you must file a form with the IRS because the overage will use up a portion of your inheritance tax excemption of $ 1.5 million.

So for instance if I give you $ 111,000 this year, that is fine and there is no tax required from anyone. However, if I die later this year I will only have $ 1.4 million that can pass to my heirs free of the inheritance tax because I already used up $ 100 k of it.

In fact I can gift you $ 1 million right now tax free. That will just mean that at my death, I've already used up $ 1 million of my $ 1.5 million excemption.

It's even less important than that, because that $ 1.5 million figure is going up every year until it disappears entirely in 2010. However current law says it will go back down to $ 1 million in 2011. The Democratic leadership in congress is offering a permanent compromise figure of around $ 3 million which is probably what will happen, so anyone is going to be able to gift away over $ 3 million without any taxes required during their lifetime.

When I went through this with a relative's estate, the excemption was $ 600 k which in my opinion was too low.

I hope that long explanation makes sense.

________________________________________________________________

On edit if I can rant a minute. There is another thread up today something to the effect of is DU better than it used to be. Years ago there was a regular poster who I wish I could remember his name but I can't right now. Anyway, he was an African-American businessman, a middle manager corporate guy if I remember right. Anyway, he was about the most knowledgeable guy on business matters on the site. He was eventually tombstoned for supporting big salaries for CEO's one day.

I think DU became a worse place the day he was tombstoned because on questions like this thread, DU is at its worst. On questions of economics, business and taxes, there is often just plain incorrect, wrong and off-the-wall information posted as fact, and it gets repeated over and over, and there just aren't enough people knowledgeable in the field to correct the grossly wrong information.

I feel bad that I can't remember the guy's name because I enjoyed talking to him for a couple of years. When I read off the wall economic threads like this one, I think of him. Maybe he's still lurking and shaking his head.

[Yupster]

4. Tell your divorced dad and teenaged kid

to move to a country with more sane gift tax laws than the one they currently live in.

For example, if they lived here in the USA, the dad could gift the $ 15,000 to the kid and none of it would be taxable income to the kid. In fact the dad could gift a million to the kid and it wouldn't be taxable income.

Which messed up country do your friends live in?