The term “gross up” is commonly used in tax jargon to refer to the process of adding the amount of gift taxes paid by a person or their estate on gifts given within three years before their death back to their total estate. This procedure is outlined in section 2035 of the Internal Revenue Code (IRC).
The term “gross up” is commonly used in tax law to describe the process of adding back gift taxes to a deceased person’s gross estate. This applies to gifts made by the person or their spouse within the three-year period before their death. The Internal Revenue Code (IRC) section 2035 defines this concept. For instance, if John gave his daughter a $100,000 gift two years before his death and paid a $20,000 gift tax on it, both the gift amount and the gift tax would be added back to his gross estate during the estate calculation process. This is known as grossing up. On the other hand, if Mary gave her son a $50,000 gift four years before her death without paying any gift tax, there would be no need to gross up the gift when calculating her estate. These examples demonstrate how grossing up operates in tax law. If a person makes a gift and pays gift tax on it within three years of their death, both the value of the gift and the gift tax are included in their estate calculation for tax purposes.
A gross up clause in a contract is a provision that requires one party to compensate the other for any taxes or costs associated with a particular payment, effectively “grossing up” the payment to ensure the recipient receives the full intended amount.
Gross up clauses are commonly used in employment contracts, real estate leases, and business transactions where one party wants to ensure that the other party receives a specified amount of money after accounting for taxes or other costs.
Gross up payments are typically taxable income for the recipient, as they are intended to cover taxes or other costs associated with a payment. However, the tax treatment can vary depending on the specific circumstances and applicable tax laws.
Yes, gross up clauses are often negotiable in contracts. Parties can negotiate the specific terms and conditions of the gross up provision, including the method of calculation and any limitations on the gross up amount.
One potential drawback of a gross up clause is the additional administrative burden and complexity of calculating and administering gross up payments. Additionally, the tax implications of gross up payments can be complex and may result in additional tax liabilities for the recipient.
The gross up amount is typically calculated by determining the amount of taxes or costs associated with a payment, and then adding that amount to the original payment to ensure the recipient receives the full intended amount.
There may be legal restrictions on gross up clauses, particularly in certain jurisdictions or industries. It is important to consult with a legal professional to ensure that any gross up clause complies with applicable laws and regulations.
In some cases, parties may agree to waive a gross up clause or negotiate alternative arrangements for addressing taxes or costs associated with a payment. However, any such waivers or modifications should be carefully documented in writing.
Before including a gross up clause in a contract, it is important to carefully consider the potential tax implications, administrative burden, and overall impact on the parties involved. Consulting with a legal and tax professional can help ensure that the gross up clause is structured appropriately.
The enforceability of a gross up clause will depend on the specific language of the contract, as well as applicable laws and regulations. If there is a dispute over a gross up clause, it may be necessary to seek legal advice and potentially pursue resolution through litigation or alternative dispute resolution methods.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
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