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A credit is an amount that reduces or eliminates tax. A unified credit applies to both the gift tax and the estate tax. You must subtract the unified credit from any gift tax that you owe. 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.
The unified credit against taxable gifts remains at $345,800 (exempting $1 million from tax) through 2009, while the unified credit against estate tax increases during the same period. The following table shows the unified credit and applicable exclusion amount for the calendar years in which a gift is made or a decedent dies after 2001.
For Gift Tax Purposes: | For Estate Tax Purposes: | |||
Year | Unified Credit | Applicable
Exclusion Amount |
Unified Credit | Applicable
Exclusion Amount |
2002 and 2003 | 345,800 | 1,000,000 | 345,800 | 1,000,000 |
2004 and 2005 | 345,800 | 1,000,000 | 555,800 | 1,500,000 |
2006, 2007, and 2008 | 345,800 | 1,000,000 | 780,800 | 2,000,000 |
2009 | 345,800 | 1,000,000 | 1,455,800 | 3,500,000 |
For examples of how the credit works, see Applying the Unified Credit to Gift Tax and Applying the Unified Credit to Estate Tax, later.
The gift tax applies to transfers by gift of property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule.
Generally, the following gifts are not taxable gifts:
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Gifts, excluding gifts of future interests, that are not more than the annual exclusion for the calendar year,
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Tuition or medical expenses you pay directly to a medical or educational institution for someone,
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Gifts to your spouse,
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Gifts to a political organization for its use, and
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Gifts to charities.
Gift Tax Annual Exclusion | |
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Year(s) | Annual Exclusion |
1998 - 2001 | $10,000 |
2002 - 2005 | $11,000 |
2006 - 2008 | $12,000 |
If you or your spouse makes a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must consent (agree) to split the gift. If you do, you each can take the annual exclusion for your part of the gift.
In 2008, gift splitting allows married couples to give up to $24,000 to a person without making a taxable gift.
If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion.
After you determine which of your gifts are taxable, you figure the amount of gift tax on the total taxable gifts and apply your unified credit for the year.
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Apply the educational exclusion. Payment of tuition expenses is not subject to the gift tax. Therefore, the gift to David is not a taxable gift.
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Apply the annual exclusion. The first $12,000 you give someone in 2008 is not a taxable gift. Therefore, your $8,000 gift to Mary, the first $12,000 of your gift to Lisa, and the first $12,000 of your gift to Ken are not taxable gifts.
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Apply the unified credit. The gift tax on $26,000 ($13,000 remaining from your gift to Lisa plus $13,000 remaining from your gift to Ken) is $5,120. For more information, see the Table for Computing Gift Tax in the Instructions for Form 709. You subtract the $5,120 from your unified credit of $345,800 for 2008. The unified credit that you can use against the gift tax in a later year is $340,680.
Generally, you must file a gift tax return on Form 709 if any of the following apply.
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You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
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You and your spouse are splitting a gift.
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You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
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You gave your spouse an interest in property that will be ended by some future event.
You do not have to file a gift tax return to report gifts to (or for the use of) political organizations and gifts made by paying someone's tuition or medical expenses.
You also do not need to report the following deductible gifts made to charities:
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Your entire interest in property, if no other interest has been transferred for less than adequate consideration or for other than a charitable use; or
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A qualified conservation contribution that is a perpetual restriction on the use of real property.
Estate tax may apply to your taxable estate at your death. Your taxable estate is your gross estate less allowable deductions.
Your gross estate includes the value of all property in which you had an interest at the time of death. Your gross estate also includes the following:
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Life insurance proceeds payable to your estate or, if you owned the policy, to your heirs;
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The value of certain annuities payable to your estate or your heirs; and
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The value of certain property you transferred within 3 years before your death.
The allowable deductions used in determining your taxable estate include:
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Funeral expenses paid out of your estate,
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Debts you owed at the time of death,
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The marital deduction (generally, the value of the property that passes from your estate to your surviving spouse),
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The charitable deduction (generally, the value of the property that passes from your estate to the United States, any state, a political subdivision of a state, the District of Columbia, or to a qualifying charity for exclusively charitable purposes), and
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The state death tax deduction (generally any estate, inheritance, legacy, or succession taxes paid as the result of the decedent's death to any state or the District of Columbia.
Basically, any unified credit not used to eliminate gift tax can be used to eliminate or reduce estate tax. However, to determine the unified credit used against the estate tax, you must complete Form 706.
An estate tax return, Form 706, must be filed if the gross estate, plus any adjusted taxable gifts and specific gift tax exemption, is more than the filing requirement for the year of death.
Adjusted taxable gifts is the total of the taxable gifts you made after 1976 that are not included in your gross estate. The specific gift tax exemption applies only to gifts made after September 8, 1976, and before 1977.
Year of Death: | Filing
Requirement: |
2002 and 2003 | 1,000,000 |
2004 and 2005 | 1,500,000 |
2006, 2007, and 2008 | 2,000,000 |
2009 | 3,500,000 |
The GST tax may apply to gifts or direct skips occurring at your death to skip persons. The GST tax is calculated on the value of the gift or bequest, after subtraction of any allocated GST exemption, at the maximum estate tax rate for the year involved. Each individual has a GST exemption equal to the applicable exclusion amount for the year involved.
A direct skip is a transfer made during your life or occurring at your death that is:
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Subject to the gift or estate tax,
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Of an interest in property, and
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Made to a skip person.
A skip person is generally a person who is assigned to a generation that is two or more generations below the generation assignment of the donor. For instance, your grandchild will generally be a skip person to you or your spouse. The GST tax is computed on the amount of the gift or bequest transferred to a skip person, after subtraction of any GST exemption allocated to the gift or bequest at the maximum gift and estate tax rates.
Your estate may have an income tax filing requirement for each year that it has $600 or more of gross income or has a beneficiary who is a nonresident alien, from the date of death until the final distribution of the assets to the beneficiaries. The tax is figured on the estate's income in a manner similar to that for individuals.
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