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IRS.gov Website
Publication 559
taxmap/pubs/p559-005.htm#en_us_publink100099815

Estate and Gift Taxes(p24)

rule
EIC
This publication does not contain all the rules and exceptions for federal estate, gift or GST taxes. Nor does it contain all the rules that apply to nonresident aliens. If you need more information, see 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, Estate of nonresident not a citizen of the United States, and the related instructions. This publication also does not contain any information about state or local taxes. That information should be available from your state and local taxing authority.
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. This is in addition to any federal income tax that you may owe on the gross income of your estate. The discussion below 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.
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, below. Even if tax applies to your gifts or your estate, it may be eliminated by the Applicable Credit Amount, discussed later.
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Person receiving your gift or bequest.(p24)

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Generally, the person who receives your gift or bequest of property from your estate will not have to pay any federal gift tax or estate tax. Also, that person will not have to pay income tax on the value of the gift or inheritance received.
Note.Gifts or bequests received from expatriates after June 16, 2008, may be subject to tax which must be paid by the recipient. Consult a qualified tax professional for more information.
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No income tax deduction.(p24)

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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 as charitable contributions) or any federal gift tax resulting from making those gifts. You also cannot deduct the value of any bequests made or estate tax resulting from making bequests.
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Filing requirements.(p24)

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For estate tax purposes, the personal representative may be required to file Form 706. If death occurred in 2013, Form 706 must be filed if the gross estate of the decedent is valued at more than $5,250,000 or if the estate elects to transfer any deceased spousal unused exemption (DSUE) to a surviving spouse (this is also known as the portability election), regardless of the size of the gross estate.
If Form 706 is required, the return and payment of any tax is due within 9 months after the date of the decedent’s death. To apply for an extension of time to file the return and/or pay the tax due, use Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes.
Note.For the estate of decedents, who died after December 31, 2010 and on or before December 31, 2013, that were not required to file a Form 706 and did not timely file a Form 706 to make the portability election, see Rev. Proc. 2014-18, 2014-7 I.R.B. to see if the estate qualifies to be granted an extension to make the portability election on or before December 31, 2014.
The federal gift tax return, Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, is filed for every year in which a gift is made. 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 for that year, or a gift not subject to the annual exclusion. The annual gift exclusion is $14,000 for 2013. See Annual exclusion, later, for more information.
Generally, you must file Form 709 by April 15, of the year after the gift was made. An extension of time to file the return is available by filing Form 8892, Application for Automatic Extension of Time To File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax.
Note.Any extension of time granted for filing an individual tax return will also automatically extend the time to file your gift tax return. An income tax return extension is made on Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.
taxmap/pubs/p559-005.htm#en_us_publink1000298748

Basic exclusion amount.(p25)

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The basic exclusion amount for gifts made during your lifetime and estates of decedents is $5,000,000. This amount is indexed for inflation. The basic exclusion amount for decedents who died in 2013 is $5,250,000.
Beginning in 2011, a predeceased spouse's unused exclusion, the Deceased Spousal Unused Exclusion (DSUE) amount, may be added to the basic exclusion amount to determine the applicable exclusion amount. The DSUE amount is only available if an election is made on the Form 706 filed by the predeceased spouse’s estate.
The total of the basic exclusion amount and any DSUE amount received from the estate of a predeceased spouse is the applicable exclusion amount. This amount may be applied against tax due on lifetime gifts and/or transfers at death.
Note.Section 303 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which increased the basic exclusion amount and authorized portability of the DSUE amount, was scheduled to expire on December 31, 2012. The provision was made permanent by section 101(a)(2) of the American Taxpayer Relief Act (ATRA), P.L. 112-240, effective January 1, 2013.
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Applicable Credit Amount(p25)

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A credit is an amount that reduces or eliminates tax. The applicable 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 applicable credit from any gift or estate tax that you owe. Any applicable 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.
In 2013, the credit on the basic exclusion amount is $2,045,800 (exempting $5,250,000 from tax). The total amount of applicable 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.
For examples of how the credit works, see Applying the applicable credit to gift tax and Applying the applicable credit to estate tax, later.
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Gift Tax(p25)

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The gift tax applies to lifetime transfers of property from one person (the donor) to another person (the donee). You make a gift if you give tangible or intangible 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:
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Annual exclusion.(p25)

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A separate annual exclusion applies to each person to whom you make a gift. The gift tax annual exclusion is subject to cost-of-living increases.
Gift Tax Annual Exclusion
Year(s)Annual Exclusion
1998 — 2001$10,000
2002 — 2005$11,000
2006 — 2008$12,000
2009 — 2012$13,000
2013$14,000
In 2013, you generally could have given gifts valued up to $14,000 per person to any number of people, and none of the gifts will be taxable. However, gifts of future interests cannot be excluded under the annual exclusion. A gift of a future interest is a gift that is limited so that its use, possession, or enjoyment will begin at some point in the future. If you are married, both you and your spouse could have separately given gifts valued up to $14,000 to the same person without making a taxable gift. If one of you gave more than the $14,000 exclusion, see Gift splitting, later.
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Example 1. (p25)
You gave your niece a cash gift of $8,000. It is your only gift to her in 2013. The gift is not a taxable gift because it is not more than the $14,000 annual exclusion.
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Example 2. (p25)
You paid the $15,000 college tuition of your friend directly to his college. Because the payment qualifies for the educational exclusion, the gift is not a taxable gift.
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Example 3. (p25)
You gave $25,000 to your 25 year-old daughter. The first $14,000 of your gift is not subject to the gift tax because of the annual exclusion. The remaining $11,000 is a taxable gift. As explained later under Applying the applicable credit to gift tax, you may not have to pay the gift tax on the remaining $11,000. However, you do have to file a gift tax return.
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More information. (p25)

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See Form 709 and its instructions for more information about taxable gifts.
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Gift splitting(p25)

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If you or your spouse made 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. For gifts made in 2013, gift splitting allows married couples to give up to $28,000 to a person without making a taxable gift. If you split a gift you made, both of you must file a gift tax return to show that you and your spouse agree to use gift splitting. Form 709 must be filed even if half of the split gift is less than the annual exclusion.
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Example.(p25)
Harold and his wife, Helen, agreed to split the gifts that they made during 2013. Harold gave his nephew, George, $21,000, and Helen gave her niece, Gina, $18,000. Although each gift is more than the annual exclusion ($14,000), by gift splitting they made these gifts without making a taxable gift. Harold’s gift to George is treated as one-half ($10,500) from Harold and one-half ($10,500) from Helen. Helen’s gift to Gina is also treated as one-half ($9,000) from Helen and one-half ($9,000) from Harold. In each case, because one-half of the split gift is not more than the annual exclusion, it is not a taxable gift. However, each of them must file a gift tax return.
taxmap/pubs/p559-005.htm#en_us_publink1000297711

Applying the applicable credit to gift tax.(p25)

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After you determine which of your gifts are taxable, figure the amount of gift tax on the total taxable gifts and apply your applicable credit for the year.
taxmap/pubs/p559-005.htm#en_us_publink1000297703
Example. (p25)
In 2013, you gave your niece, Mary, a cash gift of $8,000. It is your only gift to her this year. You paid the $15,000 college tuition of your friend, David. You gave your 25 year-old daughter, Lisa, $25,000. You also gave your 27 year-old son, Ken, $25,000. You have never given a taxable gift before. Apply the exceptions to the gift tax and the applicable credit as follows:
  1. 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.
  2. Apply the annual exclusion. The first $14,000 you give someone is not a taxable gift. Therefore, your $8,000 gift to Mary, the first $14,000 of your gift to Lisa, and the first $14,000 of your gift to Ken are not taxable gifts.
  3. Apply the applicable credit. The gift tax on $22,000 ($11,000 remaining from your gift to Lisa plus $11,000 remaining from your gift to Ken) is $4,240. Subtract the $4,240 from your applicable credit of $2,045,800 for 2013. The applicable credit that you can use against the gift or estate tax in a later year is $2,041,560.
You do not have to pay any gift tax for 2013. However, you do have to file Form 709.
For more information, see the Table for Computing Gift Tax in the Instructions for Form 709.
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Filing a gift tax return. (p25)

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Generally, you must file a gift tax return if any of the following apply:
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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More information. (p26)

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If you think you need to file a gift tax return, see Form 709 and its instructions for more information. You can get publications and forms from the IRS website, IRS.gov. You may want to speak with a qualified tax professional to receive help with gift tax questions.
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Estate Tax(p26)

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Estate tax may apply to your taxable estate at your death. Your taxable estate is your gross estate less allowable deductions.
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Gross estate.(p26)

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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:
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Taxable estate.(p26)

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The allowable deductions used in determining your taxable estate include:
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More information.(p26)

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For more information on what is included in your gross estate and the allowable deductions, see Form 706 and Form 706-NA and their instructions.
taxmap/pubs/p559-005.htm#en_us_publink1000296775

Applying the applicable credit to estate tax.(p26)

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Basically, any applicable credit not used to eliminate gift tax can be used to eliminate or reduce estate tax. However, to determine the applicable credit available for use against the estate tax, you must complete Form 706.
taxmap/pubs/p559-005.htm#en_us_publink1000296776

Filing an estate tax return.(p26)

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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. The basic exclusion amount is generally equal to the filing requirement. The basic exclusion amount is $5,000,000, indexed for inflation. For 2013, the basic exclusion amount is $5,250,000.
Note.The federal estate tax return generally does not need to be filed unless the total value of lifetime transfers and the estate is worth more than the basic exclusion amount for the year of death. However, a complete and timely filed return is required if a deceased spouse’s estate elects portability of any unused exclusion amount for use by the surviving spouse.
Adjusted taxable gifts is the total of the taxable gifts you made after 1976 that are not included in your gross estate.
Note.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 amount is the remaining applicable exclusion amount from the estate of a predeceased spouse who died after December 31, 2010. The DSUE amount is only available where an election was made on the Form 706 filed by the deceased spouse’s estate.
Note. For the estate of decedents, who died after December 31, 2010 and on or before December 31, 2013, that were not required to file a Form 706 and did not timely file a Form 706 to make the portability election, see Rev. Proc. 2014-18, 2014-7 I.R.B,. to see if the estate qualifies to be granted an extension to make the portability election on or before December 31, 2014.
taxmap/pubs/p559-005.htm#en_us_publink1000296779

Filing requirement.(p26)

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The following table lists the filing requirements for estates of decedents dying after 2001.
Basic Exclusion Amount
Year of Death:File return if estate’s value is more than:
2002 and 2003$1,000,000
2004 and 2005$1,500,000
2006, 2007, and 2008$2,000,000
2009$3,500,000
2010 and 2011$5,000,000
2012$5,120,000
2013$5,250,000
taxmap/pubs/p559-005.htm#en_us_publink1000296782

More information. (p26)

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If you think you will have an estate on which tax must be paid, or if your estate will have to file an estate tax return even if no tax will be due, see Form 706, Form 706-NA, and the forms’ instructions for more information. You (or your estate’s representative) may want to speak with a qualified tax professional to receive help with estate tax questions.
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Generation-Skipping Transfer Tax(p26)

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The generation-skipping tax (GST) 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 the gift or bequest was made. GSTs have three forms: direct skip, taxable distribution, and taxable termination.
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More information. (p26)

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If you think you will have a gift or bequest on which GST tax must be paid, see Form 709, Form 706, Form 706-NA, and the forms’ instructions for more information. You (or your estate’s representative) may want to speak with a qualified tax professional to receive help with GST questions.