Tax

Question 1

Estate Tax Definition:

Answer 1

Tax on all stuff dead guy owns that is enforced before distribution.
- Enforced before anyone gets anything.

Question 2

Inheritance Tax Definition:

Answer 2

Tax on the person receiving the gift. (Tax percent is usually based on relationship of beneficiary to the decedent).

Question 3

Progressive Tax Definition:

Answer 3

• Tax rate increases as taxable income increases.

Question 4

Why not flat tax?

Answer 4

• 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.

Question 5

Tax Bracket Definition:

Answer 5

The division at which the tax rate changes in a progressive tax system.

Question 6

Marginal Tax Rate definition:

Answer 6

Adding different brackets together is the marginal tax rate.

Question 7

Tax Deduction v. Tax Credit

Answer 7

• Deduction: Lowers tax liability by reducing taxable income.
• Credit: Dollar for dollar reduction of tax owed.

Question 8

Estate Tax Definition:

Answer 8

A tax on all the stuff the dead guys owns that we enforce before anything is distributed.

Question 9

Federal Estate Tax Exemption:

Answer 9

You can give away $12.92 million, after that it is taxed at 40%.

Question 10

Why do we have estate tax?

Answer 10

-Pay for our debts.
-Revenue Raising.

Question 11

Inter vivos gift tax:

Answer 11

-Any gift you make is taxed, but there are exceptions.

Question 12

Inter vivos gift tax exceptions:

Answer 12

-$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.

Question 13

Gift tax reiteration:

Answer 13

-Anything over the $17k given in gifts are deducted from the $12.92 million.

Question 14

Gift Tax calculation (easy):

Answer 14

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%)

Question 15

Calculating Tax (medium) Step One:

Answer 15

Calculate the decedent’s gross estate. (How much did the person control at death?)

Question 16

Calculating Tax (medium) Step Two:

Answer 16

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).

Question 17

Calculating Tax (medium) Step Three:

Answer 17

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.

Question 18

Calculating Tax (medium) Step Four:

Answer 18

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

Question 19

Calculating Tax (medium) Step Five:

Answer 19

Subtract any credits.
-Gift tax paid.
-The tax credit for the $12.92 million exemptions.
-Credit for $12.92 million is ($5,113,800).

Question 20

What happens with spouses and the $12.92 million?

Answer 20

-It is portable between spouses.
-Really the exemption is over $25 million for spouses.
-This gets complicated at death.

Question 21

Basic Tax Planning Strategy:

Answer 21

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.