Income Tax Accounting Jack is single and he made his first taxable gift of $1,00

ID: 2532684 • Letter: I

Question

Income Tax Accounting

Jack is single and he made his first taxable gift of $1,000,000 in 2008. Jack made additional gifts in 2009, at which time he gave $1,750,000 to each of his three children and an additional $1,000,000 to State University (a charity). The annual exclusion in 2009 was $13,000. Recently Jack has been in poor health and would like you to estimate his estate tax should he die this year. Jack estimates his taxable estate (after deductions) will be worth $5.4 million at his death. (Refer to Exhibit 25-1 and Exhibit 25-2.) (Enter your answers in dollars and not in millions of dollars.)

The answer is NOT $388,000, or $380,000

Explanation / Answer

Jack's estimated taxable estate in previous gift taxes and his unified credit.

Jack's previous gift taxes and donations amount to

1000000 + 3(1750000) + 1000000 = $6250000

According to question, Jack's taxable estate = $5.4 million

But unified credit = $5.4million + $6.25million + $13000 = $11863000

Below is the table for estate tax exemption:

Death Year

Estate tax exemption

Maximum rate on estate greater than exemption

2005

$1.5 million

47 %

2006, 2007 and 2008

$2 million

46 % in 2006

45 % in 2007 and 2008

2009

$3.5 million

45 %

2010

Tax repealed

Tax repealed, but gift tax still applies in some cases at 35%

2011

$1 million

55 %

Unified credit is the credit for the portion of estate tax due on taxable estates.