California Code of Regulations › Title 18 - Public Revenues › Division 2.5 - State Controller › Chapter 1 - Inheritance Tax › Article 7.1 - Gift Tax › Section 14071 - Gift Tax Credit

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) In
				  General.
A credit for any gift tax paid under the California Gift
					 Tax Law on a gift is allowed against and in reduction of the amount of any
					 inheritance tax imposed by the Inheritance Tax Law on the same transfer at the
					 death of the donor. This credit is known as the gift tax credit. The law
					 prescribes the method of calculation of the credit. Stated generally it
					 provides for the ascertainment of the gift tax relating to the transfer which
					 is to be taxed both for gift and inheritance tax purposes, and also the
					 ascertainment of the inheritance tax relating to the transfer which is to be so
					 taxed. The gift tax credit is the lower of these two factors. The two factors
					 are referred to herein as (1) the gift tax on the gift, and (2) the inheritance
					 tax on the gift. The term "gift" used herein refers to a transfer which is
					 being taxed both for gift tax and inheritance tax purposes. It is also known as
					 the includible gift.
(b)
				  Gift Tax on the Gift.
In determining factor (1), the gift tax on the gift, the
					 value of the includible gift is taken at its market value for gift tax
					 purposes. The inheritance tax value does not enter into the calculation of this
					 factor. If only one gift was ever made, the gift tax paid is the value of
					 factor (1). If more than one gift was made, it is necessary to apportion the
					 gift tax of a particular year between the gift which is being taxed for
					 inheritance tax purposes, and the gifts of that year which are not subject to
					 inheritance tax. If there were gifts in several years, each year is considered
					 by itself in determining the proportion of gift tax in a particular year
					 relating to a gift made which is also subject to inheritance tax, i.e., it is
					 not proper to add gifts of all years together determine the proportion of total
					 gift tax relating to one or more transfers being taxed twice, (see Example (3)
					 of this regulation). It should be noted further that interest and penalties on
					 the gift tax are not considered in computing the gift tax
					 credit.
(c) Inheritance Tax
				  on the Gift.
In determining factor (2), the inheritance tax on the gift,
					 the value of the includible gift is taken at the lower of its gift tax value or
					 its inheritance tax value. Using such value, the includible gift is reduced by
					 the same proportion of the annual exemption allowed to the donee in the year
					 the includible gift was made as the value of the includible gift bears to the
					 total value at the date of gift of all gifts by the donor to the donee in that
					 year. The resulting figure is known as the net includible gift. Also, if the
					 includible gift was subject to any deductions for inheritance tax purposes
					 which were not considered in arriving at its market value for gift tax
					 purposes, e.g., inheritance tax referee's appraisal fee for appraising the
					 includible gift at its date of death value, the net includible gift is reduced
					 by the same proportion of such deductions as the value of the net includible
					 gift bears to the value of all property subject to inheritance tax transferred
					 to the donee from the donor less all appropriate inheritance tax deductions
					 except the deductions in question. The resulting figure is known as the net
					 reduced includible gift, (see Example (4) of this regulation). Factor (2), the
					 inheritance tax on the gift, is the amount which bears the same proportion to
					 the total inheritance tax on transfers to the donee from the donor as the net
					 reduced includible gift bears to the clear market value of the property subject
					 to inheritance tax.
If the includible gift was a remainder interest in property
					 after a life estate, the inheritance tax value of the transfer is divided into
					 its component parts based on the ratio of remainder value to total value at the
					 time of the gift (see Example (2) of this regulation).
(d) California Gift Tax Paid Prior to Donor's
				  Death.
If any gift tax had been paid under the California Gift Tax
					 Law on an includible gift before the donor died, the payment of such tax
					 constitutes a prepayment of inheritance tax to the extent a credit for such
					 payment is allowed against and in reduction of the amount of any inheritance
					 tax imposed by the Inheritance Tax Law on the same transfer at the death of the
					 donor. This prepaid inheritance tax is treated, for inheritance tax purposes,
					 as a taxable transfer to the donee to whom the credit is
					 allowed.
(e) California Gift
				  Tax Paid After Donor's Death.
The gift tax credit is allowable even though the gift tax
					 is paid after the donor's death. The amount of the gift tax paid after death is
					 deductible as a debt of the decedent in determining the clear market value for
					 the inheritance tax only to the extent that a credit is not allowed against the
					 inheritance tax due from the donee on the includible gift. Any penalty and
					 interest paid after death which were accrued as of the date of death of the
					 donor are deductible as debts of the decedent for inheritance tax purposes. In
					 addition, any California gift tax paid after death for which no credit is
					 allowed is treated as a debt of the decedent and allowed as an inheritance tax
					 deduction.
(f) Federal Gift
				  Tax Paid Prior to Donor's Death.
If a federal gift tax was paid prior to the donor's death
					 on a transfer of property which subsequently becomes subject to both the
					 federal estate and state inheritance taxes, the payment of the federal gift tax
					 constitutes, for inheritance tax purposes, a prepayment of the federal estate
					 tax to the extent a credit for such payment is allowed against the federal
					 estate tax. If there is a probate estate, such prepaid federal estate tax is
					 taxed as an asset of the estate according to the terms of the donor's will or
					 the laws of succession. In a nonprobate proceeding the prepaid federal estate
					 tax is taxable as a transfer to the transferee or transferees who will
					 ultimately receive the benefit of the credit.
(g) Federal Gift Tax Paid After Donor's
				  Death.
A federal gift tax due and owing at the death of a donor,
					 but paid after death, is not deductible, for inheritance tax purposes, as a
					 debt of the decedent to the extent a credit for such payment is allowable
					 against the federal estate tax, when the gift tax arises from an inter vivos
					 transfer which is also includible as a transfer subject to the federal estate
					 tax. Any penalty and interest paid on the federal gift tax after death which
					 were accrued as of the date of death are allowable as an inheritance tax
					 deduction. In addition, any federal gift tax paid after death for which no
					 federal gift tax credit is allowed against the federal estate tax is allowable
					 as an inheritance tax deduction.
(h) EXAMPLES.
This regulation is illustrated by the following
					 examples:
EXAMPLE (1).
A in 1973 gave B, his adult son, two gifts. Gift No. 1 was
					 valued at $20,000 and Gift No. 2 was valued at $25,000. Both gifts were present
					 interests. No further gifts were made. The gift tax calculation was as
					 follows:
Gift No.
							 1..........................
..........................$20,000
Gift No.
							 2..........................
..........................
25,000
Total market value of
							 gifts..........................
..........................$45,000
Less: Annual
							 exemption..........................
..........................
3,000
Net taxable
							 gifts..........................
..........................$42,000
$5,000 specific exemption
Gift tax
							 due..........................
..........................$1,280
A died in 1976. He left property to B under his will which
					 after appropriate deductions had a clear market value of $30,000. The transfer
					 in 1973 of Gift No. 2 was also determined to be subject to inheritance tax. The
					 transfer of Gift No. 1 was determined not to be subject to inheritance tax.
					 Gift No. 2 was appraised as of the date of death at $22,000, and was not liable
					 for any deductions. The gift tax due on the two gifts was paid prior to the
					 donor's death. The inheritance tax is calculated as follows:
B, adult son
Bequest..........................
..........................$30,000
Transfer (Gift
							 No.2)..........................
..........................22,000
$5,000 specific
							 exemption
Tax on
							 balance..........................
$1,761
Prepaid inheritance
							 tax..........................
..........................
686
Less: Gift tax
							 credit..........................
686
$52,686
$1,076
The gift tax credit is calculated as follows:
(a)
Factor (1), Gift Tax on
				  Gift:
$25,000
/ $45,000 x $1,280 = $711
$25,000
Includible gift
45,000
Total gifts
1,280
Gift tax
711
Gift tax attributable to includible
							 gift
(b)
Factor (2), Inheritance Tax on Gift:
$22,000
/ $45,000 x $3,000 =
							 $1,467
$22,000
Includible gift, lower
							 value, at date of gift or death
45,000
Total gifts, value at date
							 of gift
3,000
Annual exemption
1,467
Proportionate annual
							 exemption
$22,000
Includible gift
Less
1,467
Proportionate annual exemption
$20,533
Net includible gift
Since the gift was not subject to deductions for
					 inheritance tax purpose which were not considered in arriving at the market
					 value of the property for gift tax purpose, the net includible gift of $20,533
					 is also the net reduced includible gift.
Algebraic formulas are used to calculate the amount of the
					 inheritance tax on the includible gift and the amount of the prepaid
					 inheritance tax, since both of them are not known. Following is a table of
					 symbols used in such formulas:
A--Tax adjustment factor (see Inheritance Rate and
					 Exemption Table in (9) of this regulation).
C--Gift tax credit, which is limited to lower of F or
					 S.
F--First limitation, gift tax on includible gift.
N--Net includible gift.
n--Net reduced includible gift.
P--Prepaid inheritance tax.
R--Rate of tax applied to total interest (see Inheritance
					 Rate and Exemption Table in (9) of this regulation).
S--Second limitation, inheritance tax on includible
					 gift.
V--Total value of property taxable to donee, but excluding
					 pre-paid inheritance tax.
The formula is:
S = n x [R - A/(V + P)]
Since this formula has two unknowns, namely, "S" and "P,"
					 it may be rewritten to simplify the computation by substituting "F" for "P" so
					 that it will have only one unknown, as follows:
S = n x [R - A/ (V + F)]
Thus, the known values of this formula are:
A
=
$1,400
F
=
$711
n
=
$20,533
R
=
0.06
V
=
$52,000 ($30,000+$22,000)
S
=
$20,533 x
							 [0.06-$1,400/($52,000+$711)]
S
=
$20,533 x 0.0334401
S
=
$686
Since S, the inheritance tax on the includible gift, is
					 less than F, the gift tax on the includible gift, the gift tax credit is $686.
					 Thus, the prepaid inheritance tax will also be $686.
Proof:
C = $20,533 x [0.06-$1,400/($52,000+$686)]
C = $686
EXAMPLE (2).
X in 1973 gave Y, his adult son, a cash gift of $20,000. He
					 also gave him a parcel of property valued at $30,000 reserving to himself a
					 life estate. X was 69 years old at the date of gift. No prior gifts had been
					 made. The gift tax was paid before the last day prescribed by law.
The gift tax calculation is as follows:
Cash
							 gift..........................
..........................$20,000
Less: Annual
							 exemption..........................
..........................
3,000
$17,000
Remainder interest in
							 property..........................
..........................
21,434
Net taxable
							 gifts..........................
..........................$38,434
$5,000 Specific exemption
Gift tax
							 due..........................
..........................$1,137
X died in 1976. He left property having a clear market
					 value of $15,000 to Y from his probate estate. The property transferred in 1973
					 in which X retained a life estate was also subject to inheritance tax. The cash
					 gift of $20,000 in 1973 was found not to be subject to inheritance tax. The
					 property in which X retained a life estate was valued as of the date of death
					 at $28,000. It was not chargeable with any deductions. The inheritance tax is
					 calculated as follows:
Y adult son
Bequest..........................
..........................$15,000
$5,000 Specific exemption
Transfer..........................
..........................28,000
..........................Tax
							 on balance
$1,343
Prepaid inheritance
							 tax..........................
..........................
572
Gift tax
							 credit..........................
-572
$43,572
$771
The gift tax credit is calculated as follows:
(a)
Factor (1), Gift Tax on
				  Gift:
($21,434/$41,434) x $1,137 = $588
$21,434 Includible gift
$41,434 ($20,000 + $21,434) Total gifts
$1,137 Gift tax
$588 Gift tax attributable to includible
					 gift
(b)
Factor (2),
				  Inheritance Tax on Gift:
($21,434/$30,000) x $28,000 = $20,005
$21,434 Gift Tax value of remainder interest
$30,000 Gift tax value of entire parcel
$28,000 Inheritance tax value of entire parcel
$20,005 Proportionate part of inheritance tax value
					 attributable to the remainder ($20,005/$41,434) x $3,000 = $1,448
$20,005 Includible gift, lower value, at date of gift or
					 death
$41,434 Total gifts, value at date of gift
$3,000 Annual exemption
$1,448 Proportionate annual exemption
$20,005
Includible
							 gift, lower value, at date of gift or death
Less
1,448
Proportionate annual exemption
$18,557
Net
							 includible gift
Since the includible gift was not subject to deductions for
					 inheritance tax purposes which were not considered in arriving at the market
					 value of the property for gift tax purposes, the net includible gift of $18,557
					 is also the net reduced includible gift.
S = n x [R - A/(V + F]
The known values of this formula are as follows:
n
=
$18,557
R
=
0.04
A
=
$400
V
=
$43,000 ($15,000 + $28,000)
F
=
$588
S
=
$18,557 x [0.04 - $400/($43,000 +
							 $588)]
S
=
$572
Since S, the inheritance tax on the gift, is less than F,
					 the gift tax on the gift, the gift tax credit is $572. Accordingly, the prepaid
					 inheritance tax will be also $572.
EXAMPLE (3).
P made gifts to S, his adult son, in 1972, 1973, 1974 and
					 1975. All of the gifts were present interests. The gifts were as
					 follows:
1972
--Cash
$10,000
1973
--Parcel A
$7,000
--Parcel B
8,000
15,000
1974
--Parcel C
$12,000
1975
--Parcel D
$5,000
--Parcel E
3,000
8,000
The gift tax calculations in the various years were as
					 follows:
1972
Cash..........................
..........................$10,000
Annual
							 exemption..........................
..........................
-3,000
$7,000
$5,000 Specific
							 exemption
1972 Gift
							 Tax..........................
..........................$60
1973
Parcel
							 A..........................
..........................$7,000
Parcel
							 B..........................
..........................
8,000
___________________________
Total
							 gifts..........................
..........................$15,000
Annual
							 exemptions..........................
..........................
-3,000
Net taxable gifts for
							 1973..........................
..........................$12,000
Prior net taxable
							 gifts..........................
..........................
7,000
Total net taxable
							 gifts..........................
..........................$19,000
$5,000
							 Specific exemptions
Total gift
							 tax..........................
$420
Less: Tax on prior
							 gift..........................
60
1973 gift
							 tax..........................
$360
1974
Parcel
							 C..........................
..........................$12,000
Annual
							 exemption..........................
..........................
-3,000
Net taxable gifts for
							 1974..........................
..........................$9,000
Prior net
							 gifts..........................
..........................
19,000
Total net taxable
							 gifts..........................
..........................$28,000
$5,000
							 Specific exemptions
Total gift
							 tax..........................
$720
Less: Tax on prior
							 gifts..........................
420
1974 gift
							 tax..........................
$300
1975
Parcel
							 D..........................
..........................$5,000
Parcel
							 E..........................
..........................
3,000
Total
							 gifts..........................
..........................$8,000
Annual
							 exemptions..........................
..........................
-3,000
Net taxable gifts for
							 1975..........................
..........................$5,000
Prior net
							 gifts..........................
..........................
28,000
Total net taxable
							 gifts..........................
..........................$33,000
$5,000
							 Specific exemptions
Total gift
							 tax..........................
$920
Less: Tax on prior
							 gifts..........................
720
1975 gift
							 tax..........................
$200
P died in 1976. He left property having a clear market
					 value of $6,000 to S from his probate estate. The gift taxes were all paid
					 prior to death. In addition the following inter vivos transfers were found to
					 be subject to inheritance tax:
Parcel B--appraised as of date of death at $7,500
Parcel C--appraised as of date of death at $13,000
Parcel D--appraised as of date of death at $4,000
The other gifts were found not to be subject to inheritance
					 tax. The inter vivos transfers were not liable for any deductions. The
					 inheritance tax is computed as follows:
S, adult son
Bequest..........................
..........................$6,000
Taxable transfers:
..........................Parcel
							 B
..........................$7,500
..........................Parcel
							 C
..........................13,000
..........................Parcel
							 D
..........................4,000
..........................Prepaid
							 inheritance tax
..........................
474
$5,000 Specific exemption
$30,974
Tax on
							 balance..........................
..........................$839
Gift tax
							 credit..........................
..........................
-474
$365
The gift tax credit is calculated as follows:
(a)
Factor (1) Gift Tax on
				  Gifts:
1973
$8,000
(includible
							 gift) / $15,000 (total gifts) x $360
=
$192
1974
$12,000
(includible
							 gift / $12,000 (total gift) x $300
=
300
1975
$5,000
(includible
							 gift) / $8,000 (total gift) x $200
=
125
Gift tax attributable to
							 includible gifts
$617
(b)
Factor (2), Inheritance Tax on Gifts:
The first step is to find the net reduced includible gifts,
					 i.e., what part of the total transfers taxable at death represents amounts also
					 taxed for gift tax purposes after considering the lower of gift tax and
					 inheritance tax value and considering the effect of the various annual
					 exemptions.
1973
$7,500
/$15,000
							 x $3,000 = $1,500
$7,500
Includible gift, lower
							 value, at date of gift or death
$15,000
Total gifts, value at date
							 of gift
$3,000
Annual exemption
$1,500
Proportionate annual
							 exemption
$7,500
Includible gift
Less:
1,500
Proportionate annual exemption
$6,000
Net includible gift
The net includible gift of $6,000 is also the net reduced
					 includible gift, since the gift was not subject to deductions for inheritance
					 tax purposes which were not considered in arriving at the market value of the
					 property for gift tax purposes.
1974
$9,000
Net
							 reduced includible gift
1975
$4,000
/$8,000
							 x $3,000 = $1,500
$4,000
Includible gift, lower
							 value, at date of gift or death
$8,000
Total gifts, value at date
							 of gift
$3,000
Annual exemption
$1,500
Proportionate annual
							 exemption
$4,000
Includible gift
Less:
1,500
Proportionate annual exemption
$2,500
Net includible gift
The net includible gift of $2,500 is also the net reduced
					 includible gift, since the gift was not subject to deductions for inheritance
					 tax purposes which were not considered in arriving at the market value of the
					 property for gift tax purposes.
$6,000
Net reduced includible gift
							 for 1973
$9,000
Net reduced includible gift
							 for 1974
$2,500
Net reduced includible gift for 1975
$17,500
Total net reduced
							 includible gifts
S = n x [R - A/(V + F)]
The known values of this formula are as follows:
n
=
$17,500
R
=
0.04
A
=
$400
V
=
$30,500
F
=
$617
First Trial
S
=
$17,500 x [0.04 - $400/($30,500 -
							 $617)]
S
=
$475
Second Trial
S
=
$17,500 x [0.04 - $400/($30,500 -
							 $475)]
S
=
$474
The $474 inheritance tax attributable to the net reduced
					 includible gifts is less than the $617 gift tax attributable to the same gifts
					 and consequently will be the gift tax credit. The prepaid inheritance tax will
					 be also $474.
EXAMPLE (4).
In examples (1), (2), and (3) or this regulation the gift
					 was not subject to deductions for inheritance tax purposes which were not
					 considered in arriving at the market value of the property for gift tax
					 purposes. Consequently, the net includible gift and the net reduced includible
					 gift were the same. This example illustrates the computation necessary if the
					 gift is subject to a deduction for inheritance tax purposes which was not
					 deductible in arriving at the market value of the property for gift tax
					 purposes.
During the year 1974, R, in contemplation of death gave T,
					 his adult son, real property valued at $250,000. The gift was a present
					 interest, and it was subject to both federal and state gift taxes. R made no
					 other gifts to T. The gift tax calculation was as follows:
Real
							 Property..........................
..........................$250,000
Annual
							 exemption..........................
..........................
-3,000
Net taxable
							 gift..........................
..........................$247,000
$5,000
							 Specific exemption
Gift tax
							 due..........................
..........................$17,300
R died in 1975. In his will he left all of his property to
					 T which after all appropriate inheritance tax deductions amounted to $150,000.
					 The 1974 gift to T was also subject to both federal estate and state
					 inheritance taxes. As of the date of death the value of the 1974 gift had
					 shrunk to $200,000. The only inheritance tax deduction for which the 1974 gift
					 was liable was the referee's fee for the date of death appraisement of the
					 includible gift. The federal gift tax credit was $33,700. The inheritance tax
					 is computed as follows:
T, adult son
Bequest..........................
$150,000
$5,000 Specific exemption
Transfer..........................
$2,000,000
Tax on balance..........................
$34,683
Less: Appraisal
							 fee..........................
200
Gift tax credit..........................
17,091
199,800
$17,592
Prepaid federal estate
							 tax..........................
33,700
Prepaid inheritance
							 tax..........................
17,091
$400,591
The gift tax credit is calculated as follows:
(a)
Factor (1), Gift Tax on
				  Gift
There was only one gift so the gift tax paid is the value
					 of factor (1), i.e., $17,300.
(b)
Factor (2), Inheritance Tax on
				  Gift:
$200,000/
$250,000 x $3,000 = $2,400
$200,000
includible gift, lower value, at
							 date of gift or death
$250,000
Total gift, value at date of
							 gift
$3,000
Annual exemption
$2,400
Proportionate annual exemption
Includible
							 gift..........................
$200,000
Less:
Proportionate annual
							 exemption..........................
$2,400
Appraisal
							 fee..........................
200
Total
							 reduction..........................
2,600
Net reduced includible
							 gift..........................
$197,400
S = n x [R - A/(V + F)]
The known values of the above formula are as
					 follows:
n
=
$197,400
R
=
0.14
A
=
$21,400
V
=
$383,500 ($150,000 + $199,800 +
							 $33,700)
F
=
$617
First Trial
S
=
$197,400 x [0.14 -
							 $21,400/($383,500 + $17,300)]
S
=
$17,096
Second Trial:
Since "S" is less than "F," substitute "S" for "F" in the
					 above formula.
S
=
$197,400 x [0.14 -
							 $21,400/($383,500 + $17,096)]
S
=
$17,091
Since the $17,091 inheritance tax attributable to the net
					 reduced includible gift is less than the $17,300 gift tax attributable to same
					 gift and consequently will be the gift tax credit. The prepaid inheritance tax
					 will be also $17,091.