Gift / Income Tax Strategies (Slides)

Question 1

Amounts of Gift Tax Limits For an Individual

Answer 1

In place to prevent avoidance of estate tax

Lifetime exemption of $11,700,000 per person and integrated with the estate tax exemption

Additionally, donors can gift $15,000 per year per recipient without affecting their lifetime exemption or current year tax liability

Question 2

Gift Tax Treatment for Education Savings Plan Contributions and Paid Education Expenses

Answer 2

Payments for education are an exclusion to the $15,000 exemption

The gift tax does not apply to tuition payments made to a qualifying educational institution as long as

1. The funds are paid directly to the institution
2. The fuds must be for tuition only (not books, room & board, et.)

Contribution for a QTP (Qualified Tuition Program) do not qualify for the educational exclusion

Question 3

Gift Tax Treatments of Contribution to 529 QTP and Benefits

Answer 3

Contributions to 529 plans are considered a gift to the beneficiary and qualify for the annual exclusion

Contributions between $15,000 and $75,000 are treated as being made over a 5-year period

Benefits of the 5-year rule:

1. Clients can move assets out of their estate faster
2. Clients can retain control of the assets
3. It maximizes the potential for compounding

Question 4

6 Types of Education Planning and the Tax Benefits of Each

Answer 4

1. Tax Credits
   - AOTC (American Opportunity Tax Credit): maximum $2,500 credit per student that reduces tax liability
   - LLC (Lifetime Learning Credit): maximum credit of $2,000 per family
2. Tax Deductions
   - SLID (Student Loan Interest Deduction): deduction for interest paid on student loans up to $2,500
   - TFD (Tuition and Fees Deduction): deduction for the cost of tuition and fees up to $4,000
3. Scholarships, Fellowships, Grants and Tuition Reduction
   - Beneficial because amounts received may not be taxable
4. Education Savings Plans (529, Coverdell, Bond Program)
   - 529 Plans: earnings on the account are not taxed, and many states offer state tax deductions for 529 plan contributions
   - ESBP (Education Savings Bond Program): interest on the bonds is not taxable when they are used for qualified education expenses
5. IRA Distributions
   - If an early distribution is used for qualified education expenses, there is no 10% penalty on the withdrawn funds
6. Employer-Provided Assistance
   - The provided benefits are not taxable to the employee up to $5,250