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

Estate and Gift Taxes(p24)

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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 noncitizens. 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.
The discussion below is to give you a general understanding of when estate, gift, and generation-skipping transfer (GST) taxes apply and when they do not. It explains how much money or property can be given away during life or left to heirs at death before any tax will be owed. If the decedent gave someone money or property during his or her life, the personal representative may have to pay the federal gift tax on behalf of the decedent. The money and property owned by the decedent at death is the estate and may be subject to federal estate tax. This is in addition to any federal income tax that is owed on the gross income of the estate.
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 a gift is given to a spouse or charity or if the estate goes to the decedent’s spouse or charity at death. If gifts are made to someone else, the gift tax usually does not apply until the value exceeds the annual exclusion for the year. See Annual exclusion under Gift Tax, below. Even if the gift or estate tax applies, it may be eliminated by the Applicable Credit Amount, discussed later.
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Person receiving the gift or bequest.(p24)

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Generally, the person who receives a gift or bequest of property from an 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 a tax which must be paid by the recipient. Consult a qualified tax professional for more information.
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No income tax deduction.(p25)

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Making a gift or leaving property from an estate to heirs does not ordinarily affect federal income tax liability. The value of gifts made (other than gifts that are charitable contributions) or any federal gift tax resulting from making those gifts cannot be deducted from income tax liability. The value of any bequests made or estate tax resulting from making bequests are also not deductible from income tax liability.
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Filing requirements.(p25)

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For estate tax purposes, the personal representative may be required to file Form 706. If death occurred in 2014, Form 706 must be filed if the gross estate of the decedent, plus any adjusted taxable gifts and specific gift tax exemption, is valued at more than $5,340,000, 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.
The federal gift tax return, Form 709, is filed for every year in which a gift is made. However, a gift tax return generally is not required unless money or property worth more than the annual exclusion for that year is given to someone other than the decedent’s spouse or the gift given is not subject to the annual exclusion. The annual gift exclusion is $14,000 for 2014. 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.
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Basic exclusion amount.(p25)

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The basic exclusion amount for decedents who died in 2014 is $5,340,000.
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.
taxmap/pubs/p559-005.htm#en_us_publink1000293810

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. The applicable credit must be subtracted from any gift or estate tax owed. Any applicable credit used against gift tax in one year reduces the amount of credit that can be used against gift or estate taxes in a later year.
In 2014, the credit on the basic exclusion amount is $2,081,800 (exempting $5,340,000 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.
taxmap/pubs/p559-005.htm#en_us_publink1000294289

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). A gift is made if tangible or intangible property (including money), the use of property, or the right to receive income from property is given without expecting to receive something of at least equal value in return. If something is sold for less than its full value or if a loan is made without interest or with reduced (less than market rate) interest, a gift may have been made.
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 a gift is made. 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
2013–2014$14,000
In 2014, generally, gifts valued up to $14,000 per person could have been given 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 the decedent was married, both the decedent and his or her spouse could have separately given gifts valued up to $14,000 to the same person without making a taxable gift. If one spouse gave a gift valued at more than the $14,000 exclusion, see Gift splitting, later.
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Example 1. (p25)
The decedent gave his niece a cash gift of $8,000. It is his only gift to her in 2014. 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)
The decedent paid the $15,000 college tuition of a 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)
The decedent gave $25,000 to her 25 year-old daughter. The first $14,000 of the 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, the estate may not have to pay the gift tax on the remaining $11,000. However, a gift tax return must be filed.
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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 the decedent or his or her spouse made a gift to a third party, the gift can be considered as made one-half by the decedent and one-half by the decedent’s spouse. This is known as gift splitting. Both spouses must agree to split the gift and in the case of deceased spouse, the personal representative will act on behalf of the decedent. If there is consent to split the gift, both spouses can apply the annual exclusion to one-half of the gift. For gifts made in 2014, gift splitting allows married couples to give up to $28,000 to a person without making a taxable gift. If a gift is split, both spouses must file a gift tax return to show an agreement 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 2014. 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.
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Applying the applicable credit to gift tax.(p26)

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After you determine which gifts are taxable, figure the amount of gift tax on the total taxable gifts and apply the applicable credit for the year.
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Example. (p26)
In 2014, the decedent gave his niece, Mary, a cash gift of $8,000. It is his only gift to her this year. The decedent paid the $15,000 college tuition of his friend David and gave his 25 year-old daughter, Lisa, $25,000. He also gave his 27 year-old son, Ken, $25,000. The decedent never gave a taxable gift before and does not have any DSUE. 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 given is not a taxable gift. Therefore, the $8,000 gift to Mary, the first $14,000 of the gift to Lisa, and the first $14,000 of the gift to Ken are not taxable gifts.
  3. Apply the applicable credit. The gift tax on $22,000 ($11,000 remaining from the gift to Lisa plus $11,000 remaining from the gift to Ken) is $4,240. Subtract the $4,240 from the applicable credit of $2,081,800 for 2014. The applicable credit that can be used against the gift or estate tax in a later year is $2,077,560.
As the personal representative of the decedent's estate, you do not have to pay any gift tax for 2014. 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. (p26)

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Generally, a gift tax return must be filed if any of the following apply:
A gift tax return does not have to be filed to report gifts to (or for the use of) political organizations or gifts made by paying someone’s tuition or medical expenses.
The following deductible gifts made to charities also do not need to be reported:
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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 the decedent's taxable estate at death. The taxable estate is the gross estate less allowable deductions.
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Gross estate.(p26)

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The gross estate includes the value of all property the decedent owns 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 the taxable estate include:
taxmap/pubs/p559-005.htm#en_us_publink1000296774

More information.(p26)

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For more information on what is included in the 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. For 2014, the basic exclusion amount is $5,340,000.
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 made by the decedent after 1976 that are not included in the 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.
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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
2014$5,340,000
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More information. (p26)

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If you think the decedent will have an estate on which tax must be paid, or if the 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. The estate’s personal 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 the decedent's life or transfers occurring at the decedent's 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, the decedent's grandchild will generally be a skip person to the decedent and his or her 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. (p27)

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If you think the decedent has made 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. The estate’s personal representative may want to speak with a qualified tax professional to receive help with GST questions.