Gift and Estate Tax / Partnership Accounting Question

Question

1) Shafi is single and lives in California (a community property state).

In 2021, Shafi gifted his niece, Nelly, a car worth $54,508. He also gifted his mother, Martina, a diamond necklace worth $12,677.

What is the total amount of taxable gifts that Shafi made in 2021?

2) Kristen and Harrison are equal partners in the KH Partnership. The partners formed the partnership five years ago by contributing cash. Prior to any distributions, Harrison has a basis in his partnership interest of $45,500. On December 31, KH makes a proportionate operating distribution of $48,500 cash to Harrison. What is the amount and character of Harrison's recognized gain or loss and what is his remaining basis in KH?

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Answer 1

Hi Rain,

RE: GIFTS (question 1)

The annual gift tax exemption/ exclusion changes every year (more or less). In 2021, it was $15,000. In 2024, it is now $18,000. So, whether we're talking in/ for 2021 or 2024, Shafi's gift to his niece exceeds the gift tax threshold. His gift to his mother does not.

What happens when a gift exceeds the annual gift tax exemption? The excess is not necessarily taxable. What happens, in fact, is that the excess reduces the lifetime estate tax exemption threshold such that, at time of Shafi's death, his estate may pay estate taxes on the amount over (in excess of) the lifetime estate tax exemption MINUS (reduced by) all of the excess amounts gifted over the years.

Just so you know, the lifetime estate tax exemption amount was $12.06 million in 2021. So, unless Shafi died wealthy and leaving behind net assets worth an amount larger than this $12+ million... gift and estate taxes may not be something for you/ Shafi to worry about. Nevertheless, when your gifts exceed the annual gift tax exemption threshold, you (the donor) must file an annual gift tax return to report this activity.

RE: PARTNERSHIP GAIN & BASIS (question 2)

Harrison's withdrawal exceeds his basis in the partnership by $3,000. He will pay capital gains taxes on this excess distribution, for one can withdraw tax-free from their capital account only to the extent they have basis. From professional experience, I can tell you that this gain is a capital gain reportable on IRS Schedule D.

Regarding his remaining basis, he doesn't have any. Please note that basis cannot dip below zero. You either have basis, i.e. "skin the game," or you don't. Since basis is used to determine tax benefits, when there are no longer any benefits to be had (zero basis), there is no new, "anti-benefits" territory to enter -- in the same way that, for example, one does not get additional income tax refunds if they have a carryover Net Operating Loss or a carryover capital loss.