Preserving and Transferring Wealth: Computing Estate and Gift Taxes

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Appendix B
Computing Taxes
Preserving and Transferring Wealth

How Are Gift Taxes Computed?

The computation involves three steps. First, taxable gifts in the current year are combined with all previous taxable gifts, and tax is computed on the total. Second, the tax on prior gifts (computed using the current rate schedules) is subtracted, leaving the tax due on the current gifts. Third, the applicable credit, as determined by the applicable exclusion amount, to the extent not previously used, is applied against the tax to determine the amount currently payable.

How Are Estate Taxes Computed?

The estate tax is computed by combining the taxable estate with taxable gifts made after 1976 and applying the current rate schedule to the total. The computed estate tax is then reduced by gift taxes paid on the post-1976 gifts and by the unified credit.

There are two very important points to note. First, taxable gifts made before 1977 are taken into account in computing the tax on gifts after 1976. These gifts are included in the cumulative total, thereby increasing the marginal tax rate applied to gifts after 1976.

Pre-1977 gifts are not included in computing the estate tax, however. Only taxable gifts made after 1976 are included in determining the cumulative lifetime and testamentary transfers subject to estate tax.

Example

Tina Tomb made taxable gifts of $300,000 in 1975. In 1984, she made additional taxable gifts of $200,000. Upon her death in 2006, her remaining property is worth
$2 million.

Tax on 1984 gifts:	x	x
1975 gifts	x	$ 300,000
1984 gifts	x	___200,000
Cumulative taxable gifts	x	$ 500,000
Gift tax	x	$ 155,800
Less:	x	x
Tax on prior gifts of $300,000 at current rates	$87,800	x
Unified credit	__96,300	(184,100)
Net gift tax payable	x	zero
x	x	x
Estate tax:	x	x
Taxable estate	x	$ 2,000,000
Taxable gifts after 12/31/76	x	200,000
Amount subject to tax	x	$ 2,200,000
x	x	x
Estate tax (before credits)	x	$ 878,800
Less:	x	x
Gift tax on post-1976 gifts	0	x
Unified credit (2006)	_345,800	(345,800)
Net estate tax payable	x	$ 533,000

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