The provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 made a number of changes to the estate tax and the gift tax rates and to the applicable exclusion amounts.
- The top marginal tax rate applicable to estates and gifts decreased from 46 percent in 2006 to 45 percent in 2007, and will remain at that rate through 2009.
- The estate tax has been repealed for 2010, and the highest gift tax rate will be decreased to 35 percent for 2010. The changes to the applicable exclusion amounts are discussed later in this publication.
- The provisions for these changes are currently set to expire for estates of decedents dying and gifts made after December 31, 2010.
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) may be subject to federal estate tax and the gross income of your estate may be subject to federal income tax. The purpose of this publication is to give you a general understanding of when these taxes apply and when they do not. It explains how much money or property you can give away during your lifetime or leave to your heirs at your death before any tax will be owed. Gifts you make during your life or bequests from your estate can also be subject to the generation-skipping transfer (GST) tax, if the gifts or bequests are to a person, such as a grandchild, who is more than one generation younger than you. taxmap/pubs/p950-000.htm#TXMP3a94c973
Most gifts are not subject to the gift tax and most estates are not subject to the estate tax. For example, there is usually no tax if you make a gift to your spouse or to a charity or if your estate goes to your spouse or to a charity at your death. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. See Annual exclusion under Gift Tax, on page 6.
Even if tax applies to your gifts or your estate, it may be eliminated by the unified credit, discussed later. However, many estates are subject to federal income tax. See Income Tax on an Estate on page 12.taxmap/pubs/p950-000.htm#TXMP649a750e
Gift tax returns are filed annually. However, you generally do not need to file a gift tax return unless you give someone, other than your spouse, money or property worth more than the annual exclusion (discussed on page 6) for that year, or a gift not subject to the annual exclusion. An estate tax return generally will not be needed unless the estate is worth more than the applicable exclusion amount for the year of death. This amount is shown in the table under Unified Credit (Applicable Exclusion Amount), later. taxmap/pubs/p950-000.htm#TXMP5f324022
Generally, the person who receives your gift or your bequest will not have to pay any federal gift tax or estate tax because of it. Also, that person will not have to pay income tax on the value of the gift or inheritance received. However, covered gifts or bequests received from expatriates after June 16, 2008, may be subject to tax. Consult your tax adviser for more information.taxmap/pubs/p950-000.htm#TXMP112fe93e
Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions). taxmap/pubs/p950-000.htm#TXMP328fda28
If you are not sure whether the gift tax, the estate tax, the income tax, or the GST tax applies to your situation, the rest of this publication may help you. It explains in general terms:
- When tax is not owed because of the unified credit,
- When the gift tax does and does not apply,
- When the estate tax does and does not apply,
- When to file a return for the gift tax or the estate tax,
- When the GST tax may apply; and
- When the income tax may apply to an estate.
This publication does not contain any information about state or local taxes. That information should be available from your local taxing authority.taxmap/pubs/p950-000.htm#TXMP6475c901
This publication does not contain all the rules and exceptions for federal estate, gift, income, or GST taxes. Nor does it contain all the rules that apply to nonresident aliens. If you need more information, see the following publication, forms, and instructions.
- Publication 559, Survivors, Executors, and Administrators;
- Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return;
- Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return;
- Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return; and
- Form 1041, U.S. Income Tax Return for Estates and Trusts.
To order these forms, call 1-800-TAX-FORMS (1-800-829-3676). If you have access to TTY/TDD equipment, you can call 1-800-829-4059. To get these forms using your personal computer, go to www.irs.gov.taxmap/pubs/p950-000.htm#TXMP405257a0
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|
|Unified Credit ||Applicable|
|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,