In Year 1, a donor makes a taxable gift of $2,000,000. The donor has made no prior taxable gifts. The applicable credit amount (unified credit) for Year 1 corresponds to an exclusion amount of $13,610,000. The gift tax rate is 40%. How much gift tax must the donor pay out-of-pocket in Year 1?

Answer options:

$800,000

$4,644,000

$2,000,000

How to approach this question

Calculate tentative tax. Compare to available Unified Credit. If Credit > Tax, Pay $0.

Full Answer

A.$0✓ Correct

IRC §2505. The donor has a lifetime exclusion of $13,610,000. Since the cumulative taxable gifts ($2,000,000) are less than the exclusion amount, the unified credit covers the entire tax liability. No out-of-pocket tax is due.

Common mistakes

Calculating the tax but forgetting to apply the unified credit.

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