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, known as your estate, also may be subject to federal estate tax. However, federal tax laws allow you to give money 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. Congress is expected to reinstate some form of estate tax for 2010. However, if no action is taken, the estate tax will return in 2011 with a higher tax rate that will apply to more estates.
|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|2010||Tax repealed||Tax repealed, but gift tax still applies in some cases at 35 percent rate|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.
|Year made||Excluded from tax|
In addition to the annual exclusion amounts, you also can give the following without triggering the gift tax:
- Charitable gifts.
- Gifts to a spouse.
- Gifts to a political organization for its use.
- Gifts of educational expenses. Unlimited as long as you make a direct payment to the educational institution for tuition only. Books, supplies and living expenses do not qualify.
- Gifts of medical expenses. Unlimited as long as they are paid directly to the medical facility.
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 through 2008, the unified credit for estate tax purposes is $780,800, which is the amount that eliminates tax liability for estates worth $2 million. The unified credit increases to $1,455,800 in 2009 for estate tax purposes, with the amount protected from the estate tax going to $3.5 million in 2009.
You must subtract the unified credit from any gift tax 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 This exclusion applies for tax years through 2009, with the estate tax scheduled to be repealed in 2010 for that year only. Any unified credit you use against your gift tax in one year reduces the amount of credit 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.
|Year in which a gift is made or a decedent dies||Unified credit for gift tax purposes||Unified credit for estate tax purposes|
|2006, 2007 and 2008||$345,800||$780,800|