Gift tax essentials
- Annual exclusion per donee, per year — available only for gifts of a present interest. Gifts of a future interest do not qualify.
- Gift splitting — married couples may elect to treat gifts as made half by each, doubling the exclusion
- Unlimited exclusions: transfers to a U.S. citizen spouse, transfers to qualified charities, and amounts paid directly to an educational institution for tuition or to a medical provider for care
IMPORTANT — OBBBA: The lifetime estate and gift tax exemption is $15 million per individual ($30 million for a married couple) beginning in 2026, indexed for inflation from 2027. Unlike the TCJA version, this amount is permanent — there is no scheduled sunset.
EXAMPLE: A grandparent pays $40,000 directly to a university for a grandchild's tuition and separately gives the grandchild $18,000 in cash. The tuition payment is entirely excluded (direct payment to the institution), and the cash gift is measured against the annual exclusion. Paying the grandchild who then pays the school would not qualify for the tuition exclusion.
Fiduciary income tax (Form 1041)
Trusts and estates are conduits: income taxed to the entity is reduced by amounts distributed to beneficiaries. The bridge is distributable net income (DNI).
- DNI limits the distribution deduction the entity can take
- DNI limits and characterizes the amount taxable to beneficiaries — the character (interest, dividends, tax-exempt) flows through proportionally
- Tax-exempt income stays exempt in the beneficiary's hands
Simple vs. complex trusts
| Simple trust | Complex trust |
|---|---|
| Must distribute all income currently | May accumulate income |
| No charitable contributions | May make charitable contributions |
| No principal distributions | May distribute principal |
EXAM TIP: Trusts reach the top marginal rate at a very low income level compared to individuals — which is exactly why distributing income to beneficiaries in lower brackets is a core planning technique tested in TCP.