Gift/Income Tax Strategies

Question 1

What is the purpose of a gift tax?

Answer 1

To prevent donors from avoiding the estate tax by transferring their wealth before their death

Question 2

What is the annual limit to employer-provided educational assistance?

Answer 2

$5,250 for undergraduate or graduate education

Question 3

Name one negative and one benefit to gifting to a 529 plan.

Answer 3

Negative: A client’s contribution is treated as a gift to the named beneficiary for gift tax and generation-skipping transfer tax purposes.

Benefit: Contributions qualify for annual gift tax exclusion and there’s a tax incentive to make a large initial gift or investment in a 529 plan.

Question 4

Identify potential education planning strategies to reduce the amount of tax a client may pay.

Answer 4

Contribute to a 529 plan
Contribute to a Coverdell education savings account
Deduct student loan interest
Receive tax-free treatment of a canceled student loan
Receive tax-free loan forgiveness through the PSLF program
Receive tax-free student loan repayment assistance
Take early distributions from an IRA while avoiding 10% penalty tax
Cash in savings bonds and avoid taxes when used for education costs
Apply tax-free educational benefits from employer

Question 5

What are the two conditions that must be met for a gift tax not to be applied when it is to a qualifying educational institution for tuition purposes?

Answer 5

Must be made directly to institution

Must be for tuition only (i.e., no exclusion for books, room and board, and other common expenses)