300 please have 3oo word include tax planning advice as well as answer the quest

Question

300

please have 3oo word include tax planning advice as well as answer the questions refrences please

TAX STRATEGY PROBLEM

I:1-48 Pedro Bourbone is the founder and owner of a highly successful small business and, over

the past several years, has accumulated a significant amount of personal wealth. His portfolio

of stocks and bonds is worth nearly $5,000,000 and generates income from dividends

and interest of nearly $250,000 per year. With his salary from the business and his

dividends and interest, Pedro has taxable income of approximately $600,000 per year

and is clearly in the top individual marginal tax bracket. Pedro is married and has three

children, ages 16, 14, and 12. Neither his wife nor his children are employed and have no

income. Pedro has come to you as his CPA to discuss ways to reduce his individual tax

liability as well as to discuss the potential estate tax upon his death. You mention the possibility

of making gifts each year to his children. Explain how annual gifts to his children

will reduce both his income during lifetime and his estate tax at death.

Pedro Bourbone is the founder and owner of a highly successful small business and, over the past several years, has accumulated a significant amount of personal wealth. His portfolio of stocks and bonds is worth nearly $5,000,000 and generates income from dividends and interest of nearly $250,000 per year. With his salary from the business and his dividends and interest, Pedro has taxable income of approximately $600,000 per year and is clearly in the top individual marginal tax bracket. Pedro is married and has three children, ages 16, 14, and 12. Neither his wife nor his children are employed and have no income. Pedro has come to you as his CPA to discuss ways to reduce his individual tax liability as well as to discuss the potential estate tax upon his death. You mention the possibility of making gifts each year to his children. Explain how annual gifts to his children will reduce both his income during lifetime and his estate tax at death.

Explanation / Answer

Hi,

Please find the answer as follows:

Gifts of upto $13000 can be given over the lifetime of an individual (also known as donor). This amount will get excluded from the tax and will reduce the overall tax liability of the donor. The total amount that can be transferred by Pedro and his wife together is equal to 78000. It is calculate by multiplying the amount of $13000 by 2 and 3 (indicates the number of children). Further, any amount of income transferred to wife in the form of a gift will not be subject to gift tax. This is so because of the provision of "Unlimited Marital Deduction".

With Pedro's current portfolio, he can start by gifting $ 13000 on an annual basis for each children. These gifts will help in moving dividends and interest from Pedro's high tax bracket to his children's lower tax bracket. Interest and dividends will get taxed at lowest marginal tax rate for Pedro's oldest kids, as his kids donot have any taxable income. In this case, the youngest child would be get taxed at the rate applicable to the parent. This is known as "Kiddie Tax".

Another option available to Pedro, is to place the funds in a trust rather than giving these gifts directly to the children, This will help in ensuring proper usage of the funds once his children have grown up.

If Pedro gives $ 13000 to his children, in the event of Pedro's death, the estate tax will also get reduced. It is so because of a decrease in the fair value of the estate. Estate tax will also get reduced, if Pedro leaves a will before his death whereby he gives a certain % of his estate to his wife.

Thanks.

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