[CFP, Estate] 12, Gifts and Gift Tax

Preparing for the CFP exam requires deep understanding of gifts and gift taxes. One key topic that's frequently tested—and often misunderstood—is the taxation of gifts. This post will dive deep into gift tax fundamentals, specifically the fair market value (FMV) calculation, split gifts, annual exclusions, and common pitfalls exam takers encounter.

🔍 Key Concepts Breakdown

1. 🎯 Definition and Importance of FMV

Gift tax is based on the Fair Market Value (FMV) of the gift on the date the gift is made. FMV is what a willing buyer would pay a willing seller in a free market transaction.

Example:

• Alex gifts stock valued at $20,000 to Taylor. If on the gifting date the stock's FMV rises to $25,000, Alex’s taxable gift is $25,000, not $20,000.

2. 👫 Gift Splitting

Married couples can split gifts, doubling the annual exclusion available and effectively reducing taxable gift amounts.

Example:

• Joe and Anne give their daughter Emma $34,000 in 2024. By splitting this gift, they each contribute $17,000, leveraging the annual exclusion to eliminate taxable gifts completely.

3. 📆 Annual Gift Tax Exclusion

For 2024, the IRS allows an annual gift exclusion of $17,000 per recipient. Amounts exceeding this limit require filing a gift tax return (Form 709).

Important:

• The exclusion resets annually and applies per recipient, per donor.

Example:

• Mia gives her nephew John $20,000 cash. Only $3,000 ($20,000 - $17,000) is taxable and must be reported on Mia's gift tax return. The first $17,000 is tax-free under the annual exclusion.

⚠️ Common Mistakes on CFP Exam

Mistake #1: ❌ Miscalculating FMV

Students often incorrectly calculate FMV based on acquisition cost, not market value at the date of gift.

Exam Example:

• Josh bought artwork for $2,000 five years ago. On gifting day, it's valued at $10,000. The taxable amount is $10,000, not $2,000.

Mistake #2: ❌ Forgetting Gift Splitting Election

Gift splitting is not automatic—it must be elected on Form 709.

Exam Tip:

• Always remember gift splitting requires consent from both spouses, and both must file a gift tax return even if no taxes are owed.

Mistake #3: ❌ Annual Exclusion Misapplication

Annual exclusion is per recipient, not per donor’s total giving.

Exam Example:

• If Liam gifts $17,000 each to four different grandchildren ($68,000 total), each gift individually is below the annual exclusion limit, so no gift tax applies.

✅ Key Takeaways & Exam Tips

• Always value gifts at their FMV on the date gifted.

• Leverage gift splitting when possible and beneficial.

• Maximize annual exclusions strategically, per recipient.

• File Form 709 accurately to document and utilize these strategies effectively.

🚩 CFP Exam Sample Question:

In 2024, Rebecca gifted $25,000 cash to her son, Michael. Rebecca and her spouse, James, elect gift splitting. How much, if any, taxable gift is reportable by Rebecca?

✅ Correct Answer: $0 taxable gift.

🎧📚 More Study Resources

To further solidify your CFP exam preparation, check out Open Exam Prep for insightful podcasts, videos, and deeper dives into CFP topics.

Good luck studying, future CFP® professionals! 🎉