Tax Flashcards
Estate Tax Definition:
Tax on all stuff dead guy owns that is enforced before distribution.
- Enforced before anyone gets anything.
Inheritance Tax Definition:
Tax on the person receiving the gift. (Tax percent is usually based on relationship of beneficiary to the decedent).
Progressive Tax Definition:
- Tax rate increases as taxable income increases.
Why not flat tax?
- Declining Marginal Utility of the Dollar.
- Flat tax would hurt the poor more than the rich.
- We should get money for public amenities from the rich.
Tax Bracket Definition:
The division at which the tax rate changes in a progressive tax system.
Marginal Tax Rate definition:
Adding different brackets together is the marginal tax rate.
Tax Deduction v. Tax Credit
- Deduction: Lowers tax liability by reducing taxable income.
- Credit: Dollar for dollar reduction of tax owed.
Estate Tax Definition:
A tax on all the stuff the dead guys owns that we enforce before anything is distributed.
Federal Estate Tax Exemption:
You can give away $12.92 million, after that it is taxed at 40%.
Why do we have estate tax?
-Pay for our debts.
-Revenue Raising.
Inter vivos gift tax:
-Any gift you make is taxed, but there are exceptions.
Inter vivos gift tax exceptions:
-$17k a year in annual exclusions.
-Gifts to spouses excluded.
-Gifts for tuition excluded.
-Gifts for medical expenses excluded.
-Gifts to charity excluded.
- All of these things are excluded IN ADDITION to the $12.92 million.
-Anything over the $17k is deducted from the $12.92 million.
Gift tax reiteration:
-Anything over the $17k given in gifts are deducted from the $12.92 million.
Gift Tax calculation (easy):
1) Calculate everything decedent owned at death.
2) Determine exemption amount applicable in year of decedent’s death.
3) Deduct exemption amount from the taxable estate. (This year $12.92 mill)
4) Multiply balance by tax rate (This year’s rate is 40%)
Calculating Tax (medium) Step One:
Calculate the decedent’s gross estate. (How much did the person control at death?)
Calculating Tax (medium) Step Two:
From the gross estate, certain deductions are authorized by the code.
*Charity and spouse acts like it don’t exist.
*State death taxes
*Expenses of administration.
(The gross estate minus the deductions is the taxable estate).
Calculating Tax (medium) Step Three:
To compute estate tax, previously made taxable gifts (above $17k exclusion) are added to the taxable estate.
We do this b/c we need to figure out how much of the $12.92 million exemption you used while you were alive.
Calculating Tax (medium) Step Four:
The rate schedule is applied to produce a tentative estate tax.
-Formula for Tax on over $1 million: $345,800 + 40% of amount over $1 million
Calculating Tax (medium) Step Five:
Subtract any credits.
-Gift tax paid.
-The tax credit for the $12.92 million exemptions.
-Credit for $12.92 million is ($5,113,800).
What happens with spouses and the $12.92 million?
-It is portable between spouses.
-Really the exemption is over $25 million for spouses.
-This gets complicated at death.
Basic Tax Planning Strategy:
1) Use the annual gift tax exclusion of $17k.
2) Use gift tax exclusion for medical expenses and tuition.
3) make use of marital deduction.
4) Life insurance would not count as the estate.
5) Both spouses should make use of individua; $12.92 million.
