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Estate and Gift Taxes

 

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. The purpose of this web page 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.

News and Events:

Federal Transfer Certificates (International)

Estate and Gift has received many questions about Federal Transfer Certificates (regarding international issues).  For instructions about obtaining  transfer certificates, contact:

I.R.S. Estate Tax Group 1114
S.B.S.E. Area 15 (International)
950 L’Enfant Plaza, S.W.
Washington, DC  20024
Telephone (202) 874-1660

This telephone number is only for questions about the estate and gift taxation of nonresidents.  For other questions, use (800) 829-1040.

The annual exclusion for gifts in 2004 will remain at $11,000.

Form 706 for dates of death occurring in 2003 is now available.  The instructions (which include rate schedules) may be found at the "Forms and Publications" link, below.

There are few significant changes to Form 706 from the 2002 version.  The one change that will impact all filers is the reduction in the allowable State Death Tax Credit to 50% of the amount computed under IRC §2011(b).

NOTE regarding Extensions of Time to File/Pay U.S. Estate Tax (Form 4768, Forms and Publications link, below).  Some errors are being made regarding completion and filing of this form.  Be sure to file the second page and to fill in the decedent's name and social security number.

Important information for Form 709/709A:

Time for filing clarification:  Page 4 of the instructions for Form 709 states (Under When to File) that "...you must file the 2003 Form 709 on or after January 1...).  It may not be clear, but this means that returns should not be filed until January 1 through the due date of the year following the year in which the gift is made.  In other words, any gifts made in 2004 will not be due (and cannot be processed) until after December 31, 2004. 

Individuals who make certain qualifying gifts are required to file Form 709, United States Gift Tax Return.  The 2003 version and instructions are now available at the "Forms and Publications" link, below.

Notice - Form 709-A is Now Obsolete.

Form 709-A, United States Short Form Gift Tax Return, is now obsolete and should not be filed. All gift tax returns must now be filed using Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. -- 21-OCT-2003.

In other news:  Form 709 has been modified for the 2004 filing season (for gifts made in 2003).  Click "Forms and Publications" below for the new form and instructions (which includes the rate schedule).

If you are filing a request for an extension of time to file an estate or gift tax return, remember that the request must go to the Cincinnati Service Center (see the address, below), even if you file your income or other tax returns elsewhere.

Links

Disaster Assistance Links

  • FEMA (Federal Emergency Management Agency)
  • SBA (Small Business Administration)

Estate and Gift Taxes

Introduction

No Tax Owed

Most gifts are not subject to the gift tax and most estates are not subject to the estate tax. (Only about 2% of all estates are subject to the estate tax). For example, there is usually no tax if you make a gift to your spouse or a qualified charity or if your estate goes to your spouse or qualified charity at your death. If you make a gift to someone else, the gift tax does not apply until the value of the gifts you give that person is more than the annual exclusion for the year. 

Even if tax applies to your gifts or your estate, it may be eliminated by the Unified Credit, refer to Publication 950, Introduction to Estate and Gift Taxes.

No Return Needed

Generally, you 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 ($11,000 in 2002, 2003 and 2004) for that year. Although a return may be required, no actual gift tax will become payable until the cumulative lifetime taxable gifts exceed the applicable exclusion amount. The donor is primarily responsible for the payment of the Gift Tax.  An estate tax return generally will not be needed unless the estate is worth more than the applicable exclusion amount ($1,000,000 for 2002) for the year of death. This amount is shown in the section under Unified Credit

To reemphasize:  Most relatively simple estates (cash, publicly traded securities, small amounts of other, easily valued assets and no special deductions or elections or jointly held property) with a total value under $1,000,000 and a date of death in 2002 or 2003 and $1,500,000 and a date of death in 2004 or 2005 do not require the filing of an estate tax return.

No Tax on the Person Receiving your Gift or Estate

The person who receives your gift or your estate generally will not have to pay any gift tax or estate tax because of it. In addition, that person will not have to pay income tax on the value of the gift or inheritance received. NOTE: There are some technical applications for "Income in Respect of Decedent" under §691 that will have to be considered for income earned but not otherwise taxed prior to the date of death.

No Income Tax Deduction

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). If you are not sure whether the gift tax or the estate tax applies to your situation, refer to Publication 950, Introduction to Estate and Gift Taxes.

Unified Credit

A credit is an amount that eliminates or reduces tax. The 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 against your gift tax reduces the credit available to use against your estate tax.

In 2001, the unified credit was $220,550, which eliminated taxes on a total of $675,000 (applicable exclusion amount) of taxable gifts and taxable estate. These amounts were increased for gifts made, and for estates of decedents dying, after 2001. The following shows the unified credit and the applicable exclusion amount for the calendar year in which a gift is made or a decedent dies.

For Gift Tax Purposes in years 2002 and 2003 the Unified Credit is $345,800, the Applicable Exclusion Amount is $1,000,000. For Estate Tax Purposes in years 2002 and 2003 the Unified Credit is $345,800 and the Applicable Exclusion Amount is $1,000,000.

For Gift Tax Purposes in years 2004 and 2005 the Unified Credit is $345,800, the Applicable Exclusion Amount is $1,000,000. For Estate Tax Purposes in years 2004 and 2005 the Unified Credit is $555,800 and the Applicable Exclusion Amount is $1,500,000.

For Gift Tax Purposes in years 2006, 2007 and 2008 the Unified Credit is $345,800, the Applicable Exclusion Amount is $1,000,000. For Estate Tax Purposes in years 2006, 2007 and 2008 the Unified Credit is $780,800 and the Applicable Exclusion Amount is $2,000,000.

For Gift Tax Purposes in year 2009 the Unified Credit is $345,800, the Applicable Exclusion Amount is $1,000,000. For Estate Tax Purposes in year 2009 the Unified Credit is $1,455,800 and the Applicable Exclusion Amount is $3,500,000.

Estate Tax

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

Gross Estate

Your gross estate includes the value of all property in which you had an interest at the time of death. Your gross estate also will include 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.
  • The value of certain property you transferred within 3 years before your death.
  • Trusts or other interests established by you or others in which you have certain powers.

Taxable Estate

The allowable deductions used in determining your taxable estate include:

1) Funeral expenses paid out of your estate,
2) Debts you owed at the time of death, and
3) The marital deduction (generally, the value of the property that passes from your estate to your surviving spouse).

For additional information, refer to Instructions for Form 706.

Gift Tax

The gift tax applies to the transfer by gift of any 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.

  • Gifts that are not more than the annual exclusion for the calendar year.
  • Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  • Gifts to your spouse.
  • Gifts to a political organization for its use.
  • Gifts to qualified charities (a deduction is available for these amounts).

Annual Exclusion

A separate annual exclusion applies to each person to whom you make a gift. For 2002, 2003 and 2004, the annual exclusion is $11,000. Therefore, you generally can give up to $11,000 each to any number of people in 2002, 2003 and 2004 and none of the gifts will be taxable.

If you are married, both you and your spouse can separately give up to $11,000 to the same person in 2002, 2003 or 2004 without making a taxable gift. If one of you gives more than $11,000 to a person in 2002, 2003, or 2004, refer to gift splitting in Publication 950, Introduction to Estate and Gift Taxes.

Gifts to individuals are not deductible on the donor's income tax returns.

Related Links

Legal Information Institute
Thomas.gov (Legislative Information Site)


Where to File and Contact Information

Use the below mailing address for all tax forms filed at the Cincinnati Service Center including Estate and Gift tax returns:

Internal Revenue Service
Cincinnati, OH 45999

To mail FedEx packages, please use the following street address:

Internal Revenue Service
201 W. Rivercenter Blvd
Covington, KY 41011

For questions about return accounts and extensions only, (no tax law questions) call: 1-866-699-4083.

Many general estate and gift tax law questions can still be answered by calling: 1-800-829-1040.  You may also find many answers to your questions by visiting Forms and Publications.

Caution: DO NOT submit tax related questions below. If you have a tax question that was not answered here or by checking Frequently Asked Questions, above, please call our toll-free tax assistance line at 1-800-829-1040 for individual tax questions or 1-800-829-4933 for business tax questions. We will not respond to tax related inquiries submitted on this page.

If you have suggestions or comments (or suggested FAQs) for the Estate and Gift Tax web site, please contact us by clicking here:  CONTACT ESTATE AND GIFT TAXWe will not be able to respond to your email, but will consider it when making improvements or additions to this site.