Estate (aka Death or Inheritance) & Gift Taxes

Whether you give things away while you are alive or after you die, our rulers 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.

2005	$1,500,000
2006	$2,000,000
2007	$2,000,000
2008	$2,000,000
2009	$3,500,000
2010 + 2011	$5,000,000
2012	$5,120,000

Tax Rates

Estates & gifts are subject to the following graduated (or as our rulers 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 2012 with a net estate of $5,500,000, only the $380,000 above the excluded amount is taxable. However, it is taxed at 35%, the rate for the $5,500,000 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 2011.

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 & Over	35%

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. For more info, you can check out IRS's instructions for Form 706.

Gift Tax

Note: From 1/1/06 through 12/31/08, the annual tax free allowance for gift taxes had been $12,000. As of 1/1/09, this increased to $13,000. This is still the limit for 2012 gifts.

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 $13,000 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 $13,000 to their daughter and her husband each year, for a total of $52,000 of tax free and non-reportable gifts. If they have grandkids, they can also be given up to $13,000 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 $13,000 per donee per donor), you are not required to file a gift tax return (709) or use up any of your lifetime exclusion ($5,120,000 for 2012).

If you do give any one person more than the $13,000 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 the 1040 extension) and submitting any expected tax. For more info, you can check out IRS's instructions for Form 709.

This page was most recently modified on:
Monday, May 28, 2012

Kerry M. Kerstetter
MBA~CPA~ATP~ATA
11802 Deer Road
Harrison, AR 72601
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