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Fillable Printable Publication 950

Fillable Printable Publication 950

Publication 950

Publication 950

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Department of the Treasury
Internal Revenue Service
Publication950
(Rev. September 2006)
Cat.No.14447X
Introduction
to Estate
and Gift
Taxes
Get forms and other information
faster and easier by:
Internet
www.irs.gov
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What’s New
The provisions of the Economic Growth and Tax Relief
Reconciliation Act of 2001 made a number of changes to
the estate tax and the gift tax rates and to the applicable
exclusion amounts.
The top marginal tax rate applicable to estate and
gifts has decreased from 47 percent in 2005 to 46
percent in 2006, and will remain at 45 percent for
2007, 2008, and 2009.
The estate tax has been repealed for 2010 and the
highest gift tax rate will be decreased to 35 percent
for 2010. The changes to the applicable exclusion
amounts are discussed later in this publication.
The provisions for these changes are currently set
to expire for estates of decedents dying and gifts
made after December 31, 2010.
Introduction
If you give someone money or property during your life,
you may be subject to federal gift tax. The money and
property you own when you die (your estate) may be
subject to federal estate tax. The purpose of this publica-
tion is to give you a general understanding of when these
taxes apply and when they do not. It explains how much
money or property you can give away during your lifetime
or leave to your heirs at your death before any tax will be
owed. Gifts you make during your life or bequests from
your estate can also be subject to an additional tax, the
generation-skipping transfer (GST) tax, if the gifts or
bequests are to a person, such as a grandchild, who is
more than one generation younger than you.
No tax owed.Most gifts are not subject to the gift tax
and most estates are not subject to the estate tax. For
example, there is usually no tax if you make a gift to your
spouse or to a charity or if your estate goes to your
spouse or to a charity at your death. If you make a gift to
someone else, the gift tax does not apply until the value
of the gifts you give that person exceeds the annual
exclusion for the year. See Annual exclusion under Gift
Tax, on page 4.
Even if tax applies to your gifts or your estate, it may
be eliminated by the unified credit, discussed later.
No return needed.Gift tax returns are filed annually.
However, you do not need to file a gift tax return unless
you give someone, other than your spouse, money or
property worth more than the annual exclusion (dis-
cussed on page 4) for that year. An estate tax return
generally will not be needed unless the estate is worth
more than the applicable exclusion amount for the year
of death. This amount is shown in the table under Unified
Credit (Applicable Exclusion Amount), on page 4.
No tax on the person receiving your gift or estate.
The person who receives your gift or your estate will not
have to pay any federal gift tax or estate tax because of it.
Page 2Publication950(September 2006)
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Also, that person will not have to pay income tax on the
value of the gift or inheritance received.
No income tax deduction.Making a gift or leaving
your estate to your heirs does not ordinarily affect your
federal income tax. You cannot deduct the value of gifts
you make (other than gifts that are deductible charitable
contributions).
What this publication contains.If you are not sure
whether the gift tax or the estate tax applies to your
situation, the rest of this publication may help you. It
explains in general terms:
When tax is not owed because of the unified credit,
When the gift tax does and does not apply,
When the estate tax does and does not apply, and
When to file a return for the gift tax or the estate
tax.
This publication does not contain any information
about state or local taxes. That information should be
available from your local taxing authority.
Where to find out more.This publication does not
contain all the rules and exceptions for federal estate and
gift taxes. It does not contain the rules that apply to
nonresident aliens. If you need more information, see the
following publication, forms, and instructions:
Publication 559, Survivors, Executors, and Admin-
istrators;
Form 709, United States Gift (and Genera-
tion-Skipping Transfer) Tax Return;
Form 706, United States Estate (and Genera-
tion-Skipping Transfer) Tax Return; and
Form 706-NA, United States Estate (and Genera-
tion-Skipping Transfer) Tax Return, Estate of non-
resident, not a citizen of the United States.
To order these forms, call 1-800-TAX-FORMS
(1-800-829-3676). If you have access to TTY/TDD equip-
ment, you can call 1-800-829-4059. To get these forms
using your personal computer, go to www.irs.gov.
Unified Credit (Applicable
Exclusion Amount)
A credit is an amount that eliminates or reduces 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.
Publication950(September 2006)Page 3
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The unified credit against taxable gifts will remain at
$345,800 (exempting $1 million from tax) through 2009,
while the unified credit against estate tax increases dur-
ing the same period. The following table shows the uni-
fied credit and applicable exclusion amount for the
calendar years in which a gift is made or a decedent dies
after 2001.
For Gift TaxFor Estate Tax
Purposes:Purposes:
ApplicableApplicable
UnifiedExclusionUnifiedExclusion
YearCreditAmountCreditAmount
2002 and
345,8001,000,000345,8001,000,000
2003
2004 and
345,8001,000,000555,8001,500,000
2005
2006,
2007, and345,8001,000,000780,8002,000,000
2008
2009345,8001,000,0001,455,8003,500,000
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 the transfer by gift of any 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 mak-
ing 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 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 ap-
plies to each person to whom you make a gift. For 2006,
the annual exclusion is $12,000. Therefore, you gener-
ally can give up to $12,000 each to any number of people
in 2006 and none of the gifts will be taxable.
However, gifts of future interests cannot be excluded
under the annual exclusion provisions. 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.
Page 4Publication950(September 2006)
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If you are married, both you and your spouse can
separately give up to $12,000 to the same person in 2006
without making a taxable gift. If one of you gives more
than $12,000 to a person in 2006, see Gift Splitting, later.
Inflation adjustment.The annual exclusion may be
increased due to cost-of-living adjustments. See the in-
structions for Form 709 for the amount of the annual
exclusion for the year you make the gift.
Example 1. In 2006, 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. Because the payment qualifies for the educa-
tional exclusion, the gift is not a taxable gift.
Example 3. In 2006, 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 make 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 2006, 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 2006. Harold gives his
nephew, George, $21,000, and Helen gives her niece,
Gina, $18,000. Although each gift is more than the an-
nual 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. How-
ever, 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.
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Example. In 2006, 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 2006,
you had never given a taxable gift. You apply the excep-
tions to the gift tax and the unified credit as follows:
1.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.
2.Apply the annual exclusion. The first $12,000 you
give someone during 2006 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.
3.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.
You subtract the $5,120 from your unified credit of
$345,800 for 2006. 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 2006. 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 exclu-
sion 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 deducti-
ble gifts made to charities:
Your entire interest in property, if no other interest
has been transferred for less than adequate con-
sideration or for other than a charitable use; or
A qualified conservation contribution that is a re-
striction (granted forever) on the use of real prop-
erty.
More information.If you need to file a gift tax return,
you should see Form 709 and its instructions.
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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 will include 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 es-
tate 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 tax-
able 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 sur-
viving spouse), and
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, or to a qualifying charity for exclusively chari-
table purposes).
More information.For more information on what is
included in your gross estate and the allowable deduc-
tions, see Form 706 and Form 706-NA and their instruc-
tions.
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.
Publication950(September 2006)Page 7
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Filing requirement.The following table lists the filing
requirement for the estate of a decedent dying after
2001.
Filing
Year of Death: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 publica-
tions and forms from the IRS website, which is
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 subtrac-
tion 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, which is www.irs.gov. You (or your
estate) may want to get a qualified estate tax profes-
sional to help with the generation-skipping transfer tax
questions.
Page 8Publication950(September 2006)
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