In this video, I discuss the unified transfer tax system as covered on the Tax Compliance and Planning (TCP) on the CPA exam.
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In the United States, there's a system called the Unified Transfer Tax that combines two types of taxes: gift tax and estate tax. Let's break this down:

Gift Tax: This applies when someone gives away property while they are still alive. These are known as "inter vivos" transfers.

Estate Tax: This is levied on the transfer of property when someone dies, referred to as "testamentary" transfers.

The unique aspect of the Unified Transfer Tax system is that it treats both these types of transfers – gifts given during life and property transferred after death – as part of a single, cumulative process for tax purposes. This means that both are considered together when determining the tax liability.

Now, there's also something called the "unified credit" or "applicable credit." This is a credit that each individual can use against their transfer tax. As of 2023, this credit is available for cumulative taxable transfers up to $12,920,000. Essentially, this means that an individual can transfer property (either as gifts while alive or as part of their estate when they pass away) up to this amount without incurring any transfer tax.

So, in simple terms, the Unified Transfer Tax system in the U.S. looks at all the property you transfer to others, both during your life and after your death, and taxes it as one big sum, with a significant exemption amount before any tax kicks in.

The concept of "Taxable Gifts" in the U.S. refers to the transfer of money or property under specific conditions. Let's break it down for clarity:

Definition of a Gift: If you transfer money or any kind of property (whether it's real estate, personal items, tangible things you can touch, or intangible items like stocks) to someone else without getting something of equal value in return, it's considered a gift for tax purposes.

Annual, Inflation-Adjusted Exclusion: Each year, you can give a certain amount of gifts without them being considered taxable. For 2023, this amount is $17,000 per recipient. This means you can give up to $17,000 to as many people as you like, and these gifts won't count towards your taxable gifts. However, this exclusion doesn't apply to what's called a "future interest" gift. This is a type of gift that the recipient can only benefit from at some future date, even if they gain immediate ownership of it.

Gift Splitting Between Spouses: There's a special provision for married couples. If one spouse makes a gift, they can treat it as if half was given by each spouse. This effectively doubles the annual exclusion amount to $34,000 per recipient. So, a couple together can give $34,000 to each person without incurring any gift tax.

In summary, the U.S. tax system allows you to give a certain amount of money or property to others each year without those gifts being taxed. For 2023, this tax-free amount is $17,000 per recipient, and married couples can combine their exclusions to give up to $34,000 per recipient tax-free. Gifts beyond these amounts in a year may be subject to gift tax, affecting the giver's taxable estate.

The "Unlimited Exclusion" rule in the U.S. tax system refers to certain types of transfers that are completely exempt from gift tax, regardless of their amount. Let's delve into the two main categories:

Payments Made Directly to an Educational Institution: If you pay for someone else's tuition expenses directly to an educational institution, these payments are not subject to gift tax. This is important to note: the payment must be made directly to the institution, not to the individual (donee) for whom the tuition is being paid. This unlimited exclusion applies only to tuition costs, not to other expenses like books, supplies, room, or board.

Payments Made Directly to a Health Care Provider for Medical Care: Similarly, if you pay for someone's medical expenses directly to the healthcare provider, these payments are also exempt from gift tax. Again, the key is that the payment must be made directly to the provider and not to the individual receiving the medical care. This includes payments for things like hospital bills, doctor's fees, and other medical expenses.

In summary, under the U.S. tax rules, any amount paid directly to educational institutions for someone's tuition, or to healthcare providers for someone's medical care, is excluded from gift tax. There's no upper limit to this exclusion, which means no matter how large these payments are, they won't be considered taxable gifts. This provision encourages financial support for education and healthcare without the burden of additional taxes.

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