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Federal Estate and Gift Taxes
The federal government imposes estate taxes (sometimes also called death taxes) on transfers of property made upon death. It also imposes gift taxes on transfers of property by gift made during the donor's life. This newsletter provides a brief overview of the federal estate tax and gift taxes.
Estate Taxes
Whether an estate will be required to file a federal estate tax return depends on the value of the estate. In 2009, an estate will have to file a return if its value exceeds $3,500,000.
A decedent's gross estate includes the value of all property in which the decedent had an interest at the time of death. This includes such items as:
- Real estate
- Stocks and bonds
- Mortgages
- Notes and cash
- Insurance on the decedent's life
- Jointly owned property
- Certain transfers of property during the decedent's life
- Powers of appointment
- Annuities
The value of the decedent's property is its fair market value as of the date of death. Appraisals and other analyses may be needed to determine the fair market value of certain property, such as closely held businesses, real estate and personal property. There are also special valuation dates and elections for special-use property, such as farms or real property used in closely held businesses, which may result in reduced valuation.
Once the gross estate is determined, certain items are deducted to arrive at the taxable estate. The most noteworthy of these deductions is the marital deduction. The estate can pass tax free to a surviving spouse provided that the surviving spouse is a US citizen and the surviving spouse's interest in the estate is not a nondeductible terminable interest. A nondeductible terminable interest is an interest in which a person other than the surviving spouse receives the right to possess or enjoy an interest in the decedent's property upon the termination of the spouse's interest in the property.
Other allowable deductions from the gross estate include:
- Certain administrative expenses
- Funeral expenses
- Claims against the estate
- Certain taxes
- Charitable bequests
The executor, personal representative or person in possession of the estate's assets must file the estate tax return within nine months of the decedent's death. The estate can apply for a six-month extension of time to file, but the taxes must be paid within nine months of the decedent's death. The time for payment of the estate tax may be extended in certain circumstances.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (the Act) gradually reduced maximum estate tax rates from 50 percent in 2002 to 45 percent for 2009. There is no estate tax in 2010. In addition, the Act has gradually increased the amount that is exempt from tax from $1 million in 2002 to $3.5 million in 2009. However, sunset provisions will bring the estate tax back to pre-Act levels unless Congress takes steps to extend the Act.
Gift Taxes
The gift tax is a tax on the transfer of property, including money, by gift to another individual. The individual who gives the gift, the donor, is primarily liable for the payment of any federal gift tax.
Certain gifts are exempt from taxation. Exempt gifts include:
- Gifts of a present interest worth $13,000 or less to any one individual in any one year (this amount is for 2009, and it is periodically adjusted)
- Gifts to a spouse
- Tuition or medical expenses paid on behalf of someone else directly to the educational or medical institution
- Charitable contributions
- Certain gifts to political organizations
If a donor's gift exceeds the exemption amount, the donor must file a gift tax return using IRS Form 709. It is possible, however, that the gift may not be subject to tax due to application of the unified credit, which applies to both estate and gift taxes. The donor, assuming he or she has not previously exhausted the unified credit, would apply the unified credit amount to the tax on the gift and result in a tax liability of zero. The only cost to the donor is a reduction of the unified credit amount available for future gifts or for use against estate taxes upon the donor's death.
Individuals must also file gift tax returns if: they gift future interests to someone (other than spouses); they give their spouses interests in property that will end with some future events; or they split gifts with their spouses.
Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the top gift tax rate is 45 percent in 2009. In 2010, the maximum rate is 35 percent.
Preparing for a Meeting with Your Tax Attorney
To read and print out a copy of the checklist, please follow the link below.
Preparing for a Meeting with your Tax Attorney
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