GST (generation-skipping tax) hypothetical calculation
Hypothetical gift / generation-skipping tax calculation question:
- I'm going to gift 20k to my grandchild this year. This is the only gift to this grandchild this year. This gift is a direct skip.
- Assume I've already exhausted my total lifetime gift and GST exemptions (e.g., say I gifted 5.6m to grandchild #2 in the previous year).
- Assume I have no DSUE, no foreign credit, no weirdness with 1976 or before, etc.
- Also assume I'm unmarried, so no spouse with whom to split the gift.
Here's what I got using the form 709:
Form 709, part 1 - No / NA for all parts here
(Now, completing other parts of the return, then returning to 709 part 2 below)
Sched A, part 2 (direct skips), col H total: 20k
(We'll come back to sched A part 4 below)
Sched B - I think I end up with >5.5m on line 3 for the previous year's grandchild #2 gift. (Nothing else special?)
Sched C - NA
Sched D, part 1:
Col B: 20k, Col C: 14k, Col D: 6k (using the 14k annual exclusion amount per recipient)
Sched D, part 2: not using any GST exemption for this year's gift
Sched D, part 3: col B: 6k, col G: 0.4, col H: 6000 * 0.4 = 2400
Sched D, part 3, total GSTT: 2400
(now completing sched A part 4)
Sched A part 4:
line 1: 20k
line 2: 14k
line 3: 6k
lines 4-8: 0 (no deductinos)
line 9: 6000
line 10: 2400
line 11: 8400
(now completing 709 main form)
709, part 2:
line 1: 8400
lines 2-5: basically accounting for previous year's gifts. Both numbers are over 1m, so we're just taking the $8400 difference for this year.
line 6: 3360 (= 0.4 * 8400)
lines 7-14: 0 (no credits)
line 15: 3360
line 16: 2400
line 17: 5760
This calculation suggests that I owe $5760 on the $6000 of the nonexempt portion of the gift! That's a 96% effective tax rate. How can that be possible?
In what should be the equivalent situation, imagine (after exclusions):
If I gift 6k to my son, then I pay 40%.
Son gifts remainder to his grandson, paying 40%.
The total left over should be 0.6 * 0.6 * 6 = 0.36 * 6 = 2160, for an effective tax rate of 3.84/6 = 64%.
Did I make a mistake?!