Estate and Gift Tax Counseling

Federal estate and gift taxes affect transfers of property at different stages in the owner's life. The gift tax applies to lifetime transfers, while estate tax is imposed on transfers at death. The gift tax return is due on April 15th following the year in which the gift is made. Generally, the estate tax return is due nine months after the date of death. You can get a six month extension if you ask for one before the due date and the estimated correct amount of tax is paid before the due date.

Federal Estate Tax

Estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of the items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "gross estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.

Once you've accounted for the gross estate, certain deductions are allowed in arriving at your "taxable estate." This will be the amount on which the tax is calculated. The deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities.

After the net amount is computed, the value of lifetime taxable gifts is added to this number and the tax is computed. The tax is then reduced by the available unified credit, which is an amount that applies to both the gift tax and the estate tax to eliminate or lower taxes.

Property Exempt from Estate Tax

All property left to a spouse is exempt from the tax, as long as the spouse is a US citizen. Also, there is no estate tax on any property you leave to a tax-exempt charity.

State Death Taxes

In addition to the federal estate tax, a state death tax may be imposed. There are two types of these taxes: inheritance taxes and estate taxes. Inheritance taxes are paid by your inheritors, not your estate. Typically, how much they pay depends on their relationship to you. State estate taxes are similar to the estate tax imposed by the federal government. Your estate must pay this tax no matter who your beneficiaries are.

The Federal Gift Tax

The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not. 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.

While a gift tax return must be filed whenever an individual makes a taxable gift, gift tax is not payable unless total taxable gifts, both in the current and prior years, exceed $1,000,000. A separate annual exclusion applies to each person to whom you make a gift. For 2009, the amount is $13,000. Thus, in 2009, you can give up to $13,000 each to any number of people and none of the gifts are taxable. For 2010, the amount remains at $13,000. This annual exclusion does not affect the unified credit.

Gifts that fall under the annual exclusion have no tax consequences. This means that the gift giver's lifetime unified credit is not affected. The annual exclusion rules mean that the total amount that a person can effectively transfer to another individual without triggering taxes is very large. Making a gift or leaving your estate to your heirs doesn't ordinarily affect your federal income tax. You can't deduct the value of gifts you make, unless the gifts are deductible charitable contributions.

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