If you give someone money or property during your life, you may be subject to federal gift tax. The money and property you own when you die, your estate, also may be subject to federal estate tax. However, federal tax laws allow you give away during your lifetime or leave to your heirs certain amounts that are exempt from taxation.

The Economic Growth and Tax Relief Reconciliation Act of 2001 provides for increasing exemptions from the estate tax, with its elimination in 2010. However, under the law’s sunset clause the tax will return in 2011 unless extended.

Estate tax phase-out
Year of death
Estate tax exemption
Maximum rate on estate

greater than exemption
2005 $1.5 million 47 percent
2006, 2007 and 2008 $2 million 46 percent in 2006

45 percent in 2007 and 2008
2009 $3.5 million 45 percent
2010 Tax repealed Tax repealed, but gift tax still applies in some cases at 35 percent rate
2011 $1 million 55 percent

Annual gift tax exclusion
You can give the following monetary amounts to each person, and to as many individuals as you want, without triggering the gift tax. The amount is indexed each year for inflation.

Annual gift tax exclusion
Year made
Excluded from tax
2007
$12,000
2008
$12,000
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In addition to the annual exclusion amounts, you also can give the following without triggering the gift tax:

  • Charitable gifts.
  • Gifts to a spouse who is a U.S. citizen. Gifts to foreign spouses are subject to a limit of $125,000 in 2007 and $128,000 in 2008. This amount is indexed for inflation.
  • Gifts of educational expenses are unlimited as long as you make a direct payment to the educational institution for tuition only. Books, supplies, and living expenses do not qualify.
  • You also do not need to include amounts that were used to pay for medical costs as long as they were paid directly to the medical facility.

Unified credit
In estate planning, you also must consider the unified credit. This is the credit for the portion of estate tax due on taxable estates. For 2006-2008, the unified credit for estate tax purposes is $780,800, which is the amount that eliminates tax liability for estates worth $2 million.

You must subtract the unified credit from any gift tax that you owe. Gift taxes don’t kick in until after you have given away $1 million over your lifetime. This exclusion applies for tax years through 2009. Any unified credit you use against your gift tax in one year reduces the amount of credit that you can use against your gift tax in a later year.

The total amount used during life against your gift tax reduces the credit available to use against your estate tax.

Unified credit
Year in which a gift is made or a decedent dies
Unified credit for gift tax purposes
Unified credit for estate tax purposes
2005 $345,800 $555,800
2006, 2007 and 2008 $345,800 $780,800
2009 $345,800 $1,455,800
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