CPA Regulation (REG) : Taxation of Gifts
Study concepts, example questions & explanations for CPA Regulation (REG)
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Example Questions
Example Question #1 : Taxable Gifts
Which of the following payments requires the filing of a gift tax return?
$20,000 to a political organization.
$20,000 cash to a friend.
$20,000 medical payment to a doctor for a friend.
$20,000 tuition payment to XYZ College for a friend.
$20,000 cash to a friend.
Payments made on another’s behalf paid directly to a health care provider for medical care or to an educational institution are not considered gifts for tax purposes. Additionally, the contribution to the political organization, while non-deductible for tax purposes, does not qualify as a gift (though there are limitations on amounts that may be contributed). Only the cash payment to the individual would require the filing of a gift tax return.
Example Question #2 : Taxable Gifts
On July 1, Year 11, Vega made a transfer by gift in an amount sufficient to require the filing of a gift tax return. Vega was still alive in Year 12. If Vega did not request an extension of time for filing the Year 11 gift tax return, the due date for filing was:
March 15, Year 12
April 15, Year 12
June 30, Year 12
June 15, Year 12
April 15, Year 12
The gift tax return date is the same date as individual tax returns, April 15 of the subsequent year of the transfer.
Example Question #3 : Taxable Gifts
Parents lend $2,000,000 to their child to start a business. The loan is interest free and is payable on demand. The imputed interest is subject to:
The generation-skipping transfer tax, but not the gift tax.
The gift tax each year the loan is outstanding.
An excise tax.
The gift tax only in the year the parents lend the money.
The gift tax each year the loan is outstanding.
In this instance, the parents gave an advantageous loan to their child, the sort of which they would not give to a third party at arm’s length. As a result, the “lost” interest income (had they made a loan to another party at arm’s length) each year is treated the same as a gift.
Example Question #1 : Taxable Gifts
Assuming tax law in effect during 2019, what amount of a decedent’s taxable estate is effectively tax free if the maximum applicable estate and gift tax credit is taken?
$15,000
$11,400,000
$4,500,000
$0
$4,500,000
The max amount that can be transferred pursuant to a death tax free is $11,400,000.
Example Question #4 : Taxable Gifts
Of the following, which is a valid deduction from a decedent’s gross estate?
Unified credit
Federal estate tax
Income tax paid on income earned and received after the decedent’s death
Expenses of administering and settling the estate
Expenses of administering and settling the estate
Expenses of administering and settling the estate are valid deductions from a decedent’s gross estate.
Example Question #5 : Taxable Gifts
Of the following, which transfer of money would require filing a full gift tax return?
Direct medical payment to a medical facility for a family member
Contribution to a political group
College tuition payment directly to the university
Payment of $30,000 cash to a friend
Payment of $30,000 cash to a friend
As of 2020, the exclusion amount for a gift tax is $15,000. This means that funds in excess of $15,000 not excluded, such as a medical payment or tuition, must have a return filed for them.
Example Question #1 : Basis Of Assets Received By Gift Or Inheritance
Parent gave securities with an adjusted basis of $10,000 and fair market value of $9,000 to a child. Later the child sold the securities for $7,000. What is the child’s basis for the securities sold?
$0
$9,000
$10,000
$7,000
$9,000
The general rule with gifts is that the donor’s basis rolls over to the recipient. The exception, however, is when FMV at the time of transfer is lower than the donor’s basis and the recipient sells the assets at a price lower than the FMV at the time of transfer. In this case, the recipient’s basis in the sold stock was the FMV at the time of the gift.
Example Question #2 : Basis Of Assets Received By Gift Or Inheritance
Ann purchased 100 shares of stock for $50 per share. Ten years later, Ann died on February 1 and bequeathed the 100 shares of stock to a relative, Blake, when the stock had a market price of $100 per share. One year later, on April 1, the stock split 2 for 1. Blake gave 100 shares of the stock to another of Ann’s relatives, Greg, on June 1 that same year, when the market value of the stock was $150 per share. What was Greg’s basis in the 100 shares of stock when acquired on June 1?
$5,000
$5,100
$15,000
$10,000
$5,000
In an inheritance, unless an alternative valuation date is selected the beneficiary’s basis in the received property is the FMV at the time of the donor’s death (here, 100 stocks at $100 per share, or $10,000). At the split, the basis remained the same, but the value and number of stocks changed (now 200 stocks at $50, still $10,000 total). In a gift, typically the recipient’s basis is that of the donor’s, which means that Greg received 100 stocks with a basis of $50 per share, or a total basis of $5,000.
Example Question #3 : Basis Of Assets Received By Gift Or Inheritance
On February 1, Year 3, Howard learned that he was bequeathed 500 shares of common stock under his mother’s will. Howard’s mother had paid $2,500 for the stock 10 years ago. Fair market value of the stock on February 1, Year 3, the date of his mother’s death, was $4,000 and had increased to $5,000 six months later. The executor of the estate elected the alternative valuation date for estate tax purposes. Howard sold the stock for $4,500 on June 1, Year 3, the date that the executor distributed the stock to him. How much income should Howard include in his Year 3 individual income tax return for the inheritance of the 500 shares of stock that he received from his mother’s estate?
$4,000
$2,500
$0
$5,500
$0
Gifts, whether from a living or deceased donor, are not taxable to the beneficiary, on the donor or the donor’s estate. In this case, Howard would only report a gain or loss for income tax purposes if he had sold the stock at a different value than the stock’s value on the alternative valuation date.
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