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Estate (aka Death or Inheritance) & Gift Taxes
Whether you give things away while you are alive or after you
die, the socialists in Washington want to penalize you and redistribute your
wealth as they deem most appropriate. However, to ensure that only the
evil rich are the ones who suffer, there is an exemption from the tax of a
certain amount of net estate value per person. Net estate is not the same
figure used for probate costs. That is the gross value of the
estate. The net estate is the gross value reduced by any debts, charitable
bequests, and final funeral & medical) costs. The maximum exemption is
based on the year of death, as follows.
|
1997 |
$600,000 |
|
1998 |
$625,000 |
|
1999 |
$650,000 |
|
2000 |
$675,000 |
|
2001 |
$675,000 |
|
2002 |
$1,000,000 |
|
2003 |
$1,000,000 |
|
2004 |
$1,500,000 |
|
2005 |
$1,500,000 |
|
2006 |
$2,000,000 |
|
2007 |
$2,000,000 |
|
2008 |
$2,000,000 |
|
2009 |
$3,500,000 |
|
2010 |
Unlimited |
|
2011 & On |
$1,000,000 |
Tax Rates
Estates & gifts are subject to the following graduated (or
as the socialists in Washington call it, "progressive") tax
rate structure. It is a bit misleading; so be careful when reviewing
it. For example, with someone passing away in 2005 with a net estate of
$1,700,000, only the $200,000 above the excluded amount is taxable. However,
it is taxed at 45%, the rate for the $1,700,000 level of estate. The
lifetime exclusion essentially wipes out all of the lower tax
brackets.
The following
tax rate schedule is applicable for people passing away during 2005.
The maximum rates are
scheduled to drop according to the following:
2004
48%
2005
47%
2006
46%
2007-2009 45%
|
TAXABLE
AMOUNT |
RATE |
|
$0
- $10,000 |
18% |
|
$10,001
- $20,000 |
20% |
|
$20,001
- $40,000 |
22% |
|
$40,001
- $60,000 |
24% |
|
$60,001
- $80,000 |
26% |
|
$80,001
- $100,000 |
28% |
|
$100,001
- $150,000 |
30% |
|
$150,001
- $250,000 |
32% |
|
$250,001
- $500,000 |
34% |
|
$500,001
- $750,000 |
37% |
|
$750,001
- $1,000,000 |
39% |
|
$1,000,001
- $1,250,000 |
41% |
|
$1,250,001
- $1,500,000 |
43% |
|
$1,500,001
- $2,000,000 |
45% |
|
$2,000,001
& Over |
47% |
Estate Tax is reported to IRS on
Form 706, which is due
nine (9) months after the date of death. If that is not possible, file
Form 4768
for an additional six (6) months time. A payment of the expected tax is
required with the 4768.
Gift Tax
Note: Since 1/1/06
through 12/31/08, the
annual tax free allowance for gift taxes has been $12,000.
Gift tax is part of the estate tax system and
not part of the income tax system. It levies the same tax on transfers
that would be assessed after the donor dies and is intended to prevent people
from giving everything away while alive and avoiding the estate (aka inheritance
and death) tax.
People are allowed to gift up to a certain
dollar value per calendar year to any single person without any requirement to
file a gift tax return (709). This annual limit is currently $12,000 and
is increased based on inflation, in $1,000 increments. It is per donor
(giver) per donee (recipient). Gift splitting between spouses is a way to
multiply that annual exclusion. For example, a married couple can each
gift $12,000 to their daughter and her husband each year, for a total of $48,000
of tax free and non-reportable gifts. If they have grandkids, they can
also be given up to $12,000 per year from each grandparent.
A big misconception people have is that gifts
will reduce their taxable income. Not true. Gifts are not deductible
on the donor's 1040. The trade-off is that gifts are not considered to be
taxable income to the recipients.
For the recipient of non-cash gifts, their
cost basis for computing future gain or loss is the lesser of the item's
original cost basis or its fair market value at the time of the gift. For
highly appreciated items, the applicability of the gift tax is based on the
current fair market value. However, when the recipient sells the asset,
s/he must use the donor's basis when computing the taxable gain. The gain
will be subject to the special long term capital gains tax rates regardless of
how long after the gift it is sold.
If your annual gifts don't exceed the annual
limit (currently $12,000 per donee per donor), you are not required to file a
gift tax return (709) or use up any of your lifetime exclusion (currently
$1,000,000).
If you do give any one person more than the $12,000 during a single calendar
year, you must file a 709 and either pay gift tax or use part of your lifetime
exclusion. When you pass away, the amount of exclusion that will be available
on your estate tax return (706) will be whatever the exclusion is at that time
reduced by the gifts you reported on 709s during your lifetime, where you opted
to offset them with part of your lifetime exclusion. If you never used any of
the credit by keeping your gifts below the annual limits, the full amount of the
credit will be available to your estate
Taxable gifts are reported to IRS on
Form 709,
which is due April 15 following the year of the gift. If more time is
needed, a six month extension (until October 15) is allowed by filing
Form 4868
(same as for 1040 extension) and submitting any expected tax.
This page was most recently modified on:
Tuesday, May 06, 2008 10:26 AM
Ozarks Time by KMK
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