Publication 950 (9/2008), Introduction to Estate and Gift Taxes

Publication 950 - Main Contents

Table of Contents

Unified Credit (Applicable Exclusion Amount)

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

The unified credit against taxable gifts remains at $345,800 (exempting $1 million from tax) through 2009, while the unified credit against estate tax increases during the same period. The following table shows the unified credit and applicable exclusion amount for the calendar years in which a gift is made or a decedent dies after 2001.

	For Gift Tax Purposes:		For Estate Tax Purposes:
Year	Unified Credit	Applicable Exclusion Amount	Unified Credit	Applicable Exclusion Amount
2002 and 2003	345,800	1,000,000	345,800	1,000,000
2004 and 2005	345,800	1,000,000	555,800	1,500,000
2006, 2007, and 2008	345,800	1,000,000	780,800	2,000,000
2009	345,800	1,000,000	1,455,800	3,500,000

For examples of how the credit works, see Applying the Unified Credit to Gift Tax and Applying the Unified Credit to Estate Tax, later.

Gift Tax

The gift tax applies to transfers by gift of 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, excluding gifts of future interests, that are not more than the annual exclusion for the calendar year,
Tuition or medical expenses you pay directly to a medical or educational institution for someone,
Gifts to your spouse,
Gifts to a political organization for its use, and
Gifts to charities.

Annual exclusion. A separate annual exclusion applies to each person to whom you make a gift. 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

For 2008, you generally can give a gift valued at up to $12,000 each, to any number of people, and none of the gifts will be taxable.

However, gifts of future interests cannot be excluded under an annual exclusion provision. 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 you are married, both you and your spouse can separately give gifts valued at up to $12,000 to the same person in 2008 without making a taxable gift. If one of you gives more than the $12,000 exclusion to a person in 2008, see Gift Splitting, later.

Example 1. In 2008, you give your niece a cash gift of $8,000. It is your only gift to her this year. The gift is not a taxable gift because it is not more than the $12,000 annual exclusion.

Example 2. You pay the $15,000 college tuition of your friend directly to his college. Because the payment qualifies for the educational exclusion, the gift is not a taxable gift.

Example 3. In 2008, you give $25,000 to your 25-year-old daughter. The first $12,000 of your gift is not subject to the gift tax because of the annual exclusion. The remaining $13,000 is a taxable gift. As explained later under Applying the Unified Credit to Gift Tax, you may not have to pay the gift tax on the remaining $13,000. However, you do have to file a gift tax return.

More information. See Form 709 and its instructions for more information about taxable gifts.

Gift Splitting

If you or your spouse makes a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must consent (agree) to split the gift. If you do, you each can take the annual exclusion for your part of the gift.

In 2008, gift splitting allows married couples to give up to $24,000 to a person without making a taxable gift.

If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion.

Example. Harold and his wife, Helen, agree to split the gifts that they made during 2008. Harold gives his nephew, George, $21,000, and Helen gives her niece, Gina, $18,000. Although each gift is more than the annual exclusion ($12,000), by gift splitting they can make 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.

Applying the Unified Credit to Gift Tax

After you determine which of your gifts are taxable, you figure the amount of gift tax on the total taxable gifts and apply your unified credit for the year.

Example. In 2008, you give your niece, Mary, a cash gift of $8,000. It is your only gift to her this year. You pay the $15,000 college tuition of your friend, David. You give your 25-year-old daughter, Lisa, $25,000. You also give your 27-year-old son, Ken, $25,000. Before 2008, you had never given a taxable gift. You apply the exceptions to the gift tax and the unified credit as follows:

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.
Apply the annual exclusion. The first $12,000 you give someone in 2008 is not a taxable gift. Therefore, your $8,000 gift to Mary, the first $12,000 of your gift to Lisa, and the first $12,000 of your gift to Ken are not taxable gifts.
Apply the unified credit. The gift tax on $26,000 ($13,000 remaining from your gift to Lisa plus $13,000 remaining from your gift to Ken) is $5,120. For more information, see the Table for Computing Gift Tax in the Instructions for Form 709. You subtract the $5,120 from your unified credit of $345,800 for 2008. The unified credit that you can use against the gift tax in a later year is $340,680.

You do not have to pay any gift tax for 2008. However, you do have to file Form 709.

Filing a Gift Tax Return

Generally, you must file a gift tax return on Form 709 if any of the following apply.

You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
You and your spouse are splitting a gift.
You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
You gave your spouse an interest in property that will be ended by some future event.

You do not have to file a gift tax return to report gifts to (or for the use of) political organizations and gifts made by paying someone's tuition or medical expenses.

You also do not need to report the following deductible gifts made to charities:

Your entire interest in property, if no other interest has been transferred for less than adequate consideration or for other than a charitable use; or
A qualified conservation contribution that is a perpetual restriction on the use of real property.

More information. If you need to file a gift tax return, you should see Form 709 and its instructions.

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 includes 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; and
The value of certain property you transferred within 3 years before your death.

Taxable Estate

The allowable deductions used in determining your taxable estate include:

Funeral expenses paid out of your estate,
Debts you owed at the time of death,
The marital deduction (generally, the value of the property that passes from your estate to your surviving spouse),
The charitable deduction (generally, the value of the property that passes from your estate to the United States, any state, a political subdivision of a state, the District of Columbia, or to a qualifying charity for exclusively charitable purposes), and
The state death tax deduction (generally any estate, inheritance, legacy, or succession taxes paid as the result of the decedent's death to any state or the District of Columbia.

More information. For more information on what is included in your gross estate and the allowable deductions, see Form 706 and Form 706-NA and their instructions.

Applying the Unified Credit to Estate Tax

Basically, any unified credit not used to eliminate gift tax can be used to eliminate or reduce estate tax. However, to determine the unified credit used against the estate tax, you must complete Form 706.

Filing an Estate Tax Return

An estate tax return, Form 706, must be filed if the gross estate, plus any adjusted taxable gifts and specific gift tax exemption, is more than the filing requirement for the year of death.

Adjusted taxable gifts is the total of the taxable gifts you made after 1976 that are not included in your gross estate. The specific gift tax exemption applies only to gifts made after September 8, 1976, and before 1977.

Filing requirement. The following table lists the filing requirement for the estate of a decedent dying after 2001.

Year of Death:	Filing Requirement:
2002 and 2003	1,000,000
2004 and 2005	1,500,000
2006, 2007, and 2008	2,000,000
2009	3,500,000

More information. If you think you will have an estate on which tax must be paid, or if your estate will have to file an estate tax return even if no tax will be due, see Publication 559, Form 706, Form 706-NA, and the forms' instructions for more information. You can get publications and forms from the IRS website at www.irs.gov. You (or your estate) may want to get a qualified estate tax professional to help with estate tax questions.

Generation-Skipping Transfer Tax

The GST tax may apply to gifts or direct skips occurring at your death to skip persons. The GST tax is calculated on the value of the gift or bequest, after subtraction of any allocated GST exemption, at the maximum estate tax rate for the year involved. Each individual has a GST exemption equal to the applicable exclusion amount for the year involved.

A direct skip is a transfer made during your life or occurring at your death that is:

Subject to the gift or estate tax,
Of an interest in property, and
Made to a skip person.

A skip person is generally a person who is assigned to a generation that is two or more generations below the generation assignment of the donor. For instance, your grandchild will generally be a skip person to you or your spouse. The GST tax is computed on the amount of the gift or bequest transferred to a skip person, after subtraction of any GST exemption allocated to the gift or bequest at the maximum gift and estate tax rates.

More information. If you think you will have 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. You can get publications and forms from the IRS website, www.irs.gov. You (or your estate) may want to get a qualified estate tax professional to help with the GST questions.

Income Tax on an Estate

Your estate may have an income tax filing requirement for each year that it has $600 or more of gross income or has a beneficiary who is a nonresident alien, from the date of death until the final distribution of the assets to the beneficiaries. The tax is figured on the estate's income in a manner similar to that for individuals.

Filing an income tax return. Every estate with an income tax filing requirement must file a Form 1041 and include a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc., for each beneficiary.

Schedule K-1. The Schedules K-1 (Form 1041) report a beneficiary's share of income and expenses from the estate. In the estate's final year, the beneficiaries may be able to take advantage of the estate's excess deductions.

More information. If you think your estate may have other tax filing requirements, see Form 1041 and its instructions, and Publication 559.