August 2002

Maximizing the Gift Tax Exemption

By Barbara Latwin and Barbara Greene, D’Arcangelo & Co., LLP

The planning opportunities created by the increase in the gift tax exemption in 2002 from $675,000 to $1 million do not come without some caveats. Gifting an additional $325,000 in 2002 or after would benefit a taxpayer whose previous gifts total $675,000. For taxpayers that made gifts in excess of the $675,000 gift tax exemption, however, the additional $325,000 gift in 2002 and beyond will actually generate some gift taxes. The reality is that a taxpayer that has already paid a gift tax will be able to give away less than the $325,000 tax-free.

When preparing a gift tax return, the tax is computed on the total gifts made in the current year and all prior years. The tax on prior gifts is subtracted to arrive at the tax due on new gifts. All the calculations are made using the current year’s schedule.

Assuming the gift taxes are filed in 2002, the tax on the first $1 million (with a unified credit of $345,800) is subtracted from the tentative tax to arrive at a tax due. The lower brackets of the graduated tax system are absorbed by the $1 million excludable gift and gifts above the $1 million are taxed at a higher rate (see the Exhibit).

The Exhibit demonstrates that one cannot assume there will be no tax liability. For taxpayers that want to maximize their credit but not pay additional gift taxes, a calculation can be made to determine the amount of gift that can be passed free of gift tax. A taxpayer in the 50% bracket in 2002 can gift an additional $250,500 ($250,500 ¥ 50% = $125,250) without incurring additional taxes.

Milton Miller, CPA

William Bregman, CFR, CPA/PFS

Contributing Editors:
Theodore J. Sarenski, CPA
Dermody Burke & Brown P.C.

David R. Marcus, JD, CPA
Marks, Paneth & Shron LLP

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