A grandparent wants to fund their grandchild's future college education while minimizing transfer taxes. They are considering contributing to a Section 529 plan. Which of the following statements accurately describes the gift tax treatment of a contribution of $85,000 in a single year (assume annual exclusion is $17,000)?

Answer options:

The entire $85,000 is a taxable gift in the year of contribution.

Only $17,000 is allowed as an exclusion; $68,000 is taxable.

The donor can elect to treat the contribution as made ratably over 5 years, resulting in $0 taxable gift.

The contribution is unlimited and fully exempt from gift tax.

How to approach this question

Recognize the 5-year election for 529 plans. Max lump sum = 5 * Annual Exclusion.

Full Answer

C.The donor can elect to treat the contribution as made ratably over 5 years, resulting in $0 taxable gift.✓ Correct

IRC §529(c)(2)(B). A donor can elect to treat a contribution to a 529 plan as if it were made ratably over 5 years. $85,000 / 5 = $17,000. Since this equals the annual exclusion, the gift is fully covered by the exclusion for the current year and the next 4 years.

Common mistakes

Applying the annual exclusion only once to the lump sum.

Question 19 All questions Question 21

Practice the full CPA TCP Practice Exam 4

68 questions · hints · full answers · grading

More questions from this exam

Q01In Year 1, an executive exercises Incentive Stock Options (ISOs) to purchase 1,000 shares of comp...Medium Q02A taxpayer provides an interest-free loan of $200,000 to their adult child on January 1, Year 1, ...Hard Q03A taxpayer, age 15, has $4,500 of interest income and no earned income in Year 1. The taxpayer is...Medium Q04A taxpayer anticipates their marginal tax rate will increase from 24% in Year 1 to 35% in Year 2....Medium Q05A taxpayer is subject to the safe harbor rules for estimated tax payments. Their Year 1 Adjusted ...Medium

View all 68 questions →