Estate and gift tax Publication 904 on interrelated computations revised

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Publication 904, Interrelated Computations for Estate and Gift Tax, (Rev. October 2022), explains and illustrates how to calculate estate and gift taxes when an interrelated calculation is required. The publication was last revised in May 1985.

Estate and gift tax calculations

For estate tax purposes, an interrelated calculation is necessary if:

1. A charitable and/or marital deduction is allowed, and 
2. The property passing to the charity or surviving spouse bears the burden of paying federal estate tax, federal generation-skipping transfer tax, penalties, state transfer taxes, or certain allowable administrative expenses.

For gift tax purposes, an interrelated calculation is required if a recipient of a gift agrees to pay the gift tax on the transferred property. The amount of the gift to the recipient is reduced by the payment of the gift tax. Because the tax paid reduces the gift, the tax due on the gift is also lessened. This is known as a net gift.

Computation methods and illustrated examples

Publication 904 explains the two methods that can be used to calculate the estate or gift tax. In the Trial and Substitution method, a series of computations is done, continuing until two consecutive calculations are equal. For estate tax purposes, the last computation is the correct amount of estate tax due. For gift tax purposes, the computations end when the gift tax paid by the recipient is equal to the amount of the gift tax.

There are two options available to use under the Trial and Substitution method—the conventional option and the alternate option. Both options are described in the publication.

The Algebraic method, which can be a shorter method to use but also possibly more complex, uses a linear algebraic equation to determine the deduction and the tax.

Various fact scenarios are presented in the Estate and Gift Tax examples. For each fact scenario, the Trial and Substitution and Algebraic methods are used to compute the estate or gift tax.