Table of Contents
- Unified Credit (Applicable Credit Amount)
- Gift Tax
- Estate Tax
- Generation-Skipping Transfer Tax
- Income Tax on an Estate
A credit is an amount that reduces or eliminates tax. The unified credit applies to both the gift tax and the estate tax and it equals the tax on the applicable exclusion amount. You must subtract the unified credit from any gift or estate tax that you owe. Any unified credit you use against gift tax in one year reduces the amount of credit that you can use against gift or estate taxes in a later year.
Beginning in 2011, the amount of unified credit available to a person will equal the tax on the basic exclusion amount plus the tax on any deceased spousal unused exclusion (DSUE) amount. The DSUE is only available if an election was made on the deceased spouse's Form 706.
The unified credit on the basic exclusion amount for 2011 is $1,730,800 (exempting $5 million from tax) and is $1,772,800
for 2012 (exempting $5,120,000 from tax).
The following table shows the unified credit (recalculated at current rates) for the calendar years in which a gift is made or a decedent dies after 2001.
|Period||Recalculated Unified Credit|
|1977 (Quarters 1 and 2)||$6,000|
|1977 (Quarters 3 and 4)||$30,000|
|1987 through 1997||$190,800|
|2000 and 2001||$217,050|
|2002 through 2010||$330,800|
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), the use of property, or the right to receive income from property without expecting to receive something of at least equal value in return. If you sell something for 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:
Gifts, excluding gifts of future interests, that are not more than the annual exclusion for the calendar year,
Tuition or medical expenses paid directly to an educational or medical institution for someone else,
Gifts to your spouse,
Gifts to a political organization for its use, and
Gifts to charities.
|Gift Tax Annual Exclusion|
|1998 – 2001||$10,000|
|2002 – 2005||$11,000|
|2006 – 2008||$12,000|
|2009 – 2012||$13,000|
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 agree to split the gift. If you do, you each can take the annual exclusion for your part of the gift.
Currently, gift splitting allows married couples to give up to $26,000 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.
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.
Apply the annual exclusion. The first $13,000 you give someone is not a taxable gift. Therefore, your $8,000 gift to Mary, the first $13,000 of your gift to Lisa, and the first $13,000 of your gift to Ken are not taxable gifts.
Apply the unified credit. The gift tax on $24,000 ($12,000 remaining from your gift to Lisa plus $12,000 remaining from your gift to Ken) is $4,680. Subtract the $4,680 from your unified credit of $1,730,800 for 2011. The unified credit that you can use against the gift or estate tax in a later year is $1,726,120.
For more information, see the Table for Computing Gift Tax in the Instructions for Form 709.
Generally, you must file a gift tax return if any of the following apply:
You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
You and your spouse are splitting a gift.
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.
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:
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
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 you own partially or outright at the time of death. Your gross estate also includes the following:
Life insurance proceeds payable to your estate or, if you owned the policy, to your heirs;
The value of certain annuities payable to your estate or your heirs; and
The value of certain property you transferred within 3 years before your death.
The allowable deductions used in determining your taxable estate include:
Funeral expenses paid out of your estate,
Debts you owed at the time of death,
The marital deduction (generally, the value of the property that passes from your estate to your surviving spouse),
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
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 available for use against the estate tax, you must complete Form 706.
An estate tax return must be filed if the gross estate, plus any adjusted taxable gifts and specific gift tax exemption, is more than the basic exclusion amount. Beginning in 2010, the basic exclusion amount is $5,000,000; it will be indexed for inflation starting in 2012. The basic exclusion amount is generally equal to the filing requirement.
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 January 1, 1977.
The applicable exclusion amount is the total amount exempted from gift and/or estate tax. For estates of decedents dying after December 31, 2010, the applicable exclusion amount equals the basic exclusion amount plus any deceased spousal unused exclusion (DSUE) amount. The DSUE is the remaining applicable exclusion amount from the estate of a predeceased spouse who died after December 31, 2010. The DSUE is only available where an election was made on the Form 706 filed by the deceased spouse's estate.
The GST tax may apply to gifts during your life or transfers occurring at your death, called bequests, made to skip persons. A skip person is a person who belongs to a generation that is two or more generations below the generation of the donor. For instance, your grandchild will generally be a skip person to you or your spouse.
The GST tax is figured on the amount of the gift or bequest transferred to a skip person, after subtracting any GST exemption allocated to the gift or bequest at the maximum gift and estate tax rates. Each individual has a GST exemption equal to the basic exclusion amount, as indexed for inflation, for the year involved.
GSTs have three forms: direct skip, taxable distribution, and taxable termination.
A direct skip is a transfer made during your life or occurring at your death that is:
Subject to the gift or estate tax,
Of an interest in property, and
Made to a skip person.
A taxable distribution is any distribution from a trust to a skip person which is not a direct skip or a taxable termination.
A taxable termination is the end of a trust's interest in property where the property interest will be transferred to a skip person.
Your estate may have an income tax filing requirement for each year that it has $600 or more of gross income or a beneficiary who is a nonresident alien. The tax is figured on the estate's income in a manner similar to that for individuals.
Excess deductions on termination, which are treated as itemized deductions;
Unused capital loss carryovers;
Unused net operating loss carryovers; and
Payment of estimated taxes.
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