Transfer Taxes New Guidance to Apply to Different Exemptions to Unified Gift & Estate Taxes.

• Author: Josephs, Stuart R.
• Position: FedTax

Transfer taxes include gift and estate taxes.

A unified credit (exemption) offsets gift laxes. Any remaining credit reduces the estate tax. This credit is called the applicable exclusion amount (AEA) and includes the basic exclusion amount (BEA).

Under IRC Sec. 2010(c)(3)(A), the BEA is $5,000,000--adjusted for inflation. However, Sec. 2010(c)(3)(C) increases the BEA to $10,000,000, adjusted for inflation, for gifts made and estates of decedents dying after 2017 and before 2026. Thus, for 2022, an individual's BEA is $12,060,000.

IRS'Action

The IRS identified the following situations where BEA increases or decreases could be potentially problematic:

Situation Effect of BE As

1 Increase on gift tax.

2 Increase on estate tax.

3 Decrease on gift tax.

4 Decrease on estate tax.

However, only Situation 4 was determined to be problematic and is addressed by Regs. Sec. 20.2010-1. To better understand the concern and remedy regarding Situation 4, the gift and estate computations (shown next) must be reviewed.

Tax Computations Gift Tax

1 Determine tentative tax on all current year and prior periods taxable gifts.

2 Determine tentative tax on all prior periods taxable gifts.

3 Determine net tentative tax on current year gifts, as follows:

Step 1 tax $________

Less-Step 2 tax ________

Net tentative current year tax $________

4 Determine the applicable credit amount, which is the tentative tax on the applicable exclusion amount (AEA) computed as if the donor died on the last day of the current calendar year. The AEA includes the BEA for the gift year.

5 Determine the credits against the tax on gifts made in the prior periods. The credit for each prior period is the tentative tax, computed at the rates in effect for the current period, on the AEA for each prior period. This credit cannot exceed the tentative tax on the gifts made in that prior period.

6. Determine current year's credit:

   Step 4 credit $________

   Less-Step 5 credit ________

   Current year's credit $________

7. Determine the current year's net tax, as follows:

   Step 3 tax $________

   Less-Step 6 credit ________

   Current year's net tax $________

   Estate Tax

   1 Determine tentative tax on the taxable estate and adjusted taxable gifts, which are all taxable gifts made after 1976--except those included in the gross estate.

   2 Compute a hypothetical gift tax, called the gift tax payable, an all post-1976 taxable gifts, whether or not included in the gross estate. The credit for each year that a gift was made...