Gift tax and Estate tax in USA

ANNUAL EXCLUSION: An annual exclusion applies to each person to whom a gift is made. The gift tax annual exclusion is subject to cost-of-living increases. In the current year, if a gift allowable annual exclusion is $$$$ per person and could have been given to any number of people, none of the gifts will be taxable. However, gifts of future interests can't be excluded under the annual exclusion. A gift of a future interest is a limited gift so that its use, possession, or enjoyment will begin at some point in the future. If the decedent was married, the decedent and his or her spouse could have separately given gifts valued up to $$$$ to the same person without making a taxable gift. If one spouse gave a gift valued at more than the $$$$ exclusion, see our topic below about gift splitting between taxpayer and spouse. For example, Assuming your annual exclusion for the year is $20,000 and if the decedent gave $35,000 to his son and $10,000 to his daughter, these are the only gifts the decedent gave this year. The first $20,000 gift given to his son will be tax-free because of the annual exclusion. The amount that will have the gift tax $35,000 minus $20,000 plus $10,000 = $25,000 will have to pay gift tax. Applying the applicable credit to gift tax, the estate may not have to pay the gift tax on the remaining some of the amount $25,000. However, a gift tax return must be filed.

BASIC EXCLUSION: The basic exclusion amount of $$$$ for a decedent who died in the current year can be found on the IRS website. Beginning in 2011, a predeceased spouse's unused exclusion, the Deceased Spousal Unused Exclusion (DSUE) amount, may be added to the basic exclusion amount to determine the applicable exclusion amount. The DSUE amount is only available if an election is made on Form 706 filed by the predeceased spouse’s estate. The applicable exclusion amount is the total of the basic exclusion amount and any DSUE amount received from a predeceased spouse's estate. This amount may be applied against tax due on lifetime gifts and/or transfers at death. For example, Assuming a $15,000 annual exclusion amount, the decedent paid $25,000 to his daughter and $30,000 to his son. Applying the annual exclusion amount, the decedent paid $15,000 to his daughter, and $15,000 to his son are not taxable gifts, but he may or may not be paying the gifts tax on $10,000 to his daughter and $30,000 to his son based on other credits exclusion.

GENERATION-SKIPPING TRANSFER TAX (GST) EXCLUSION: It may apply to gifts during the decedent's life or transfers at the decedent's death, called bequests, made to skip persons. A skip person is a person who belongs to a generation that is two or more generations below the generation of the donor. For instance, the decedent's grandchild will generally be a skip person to the decedent and his or her spouse. The GST tax is figured on the amount of the gift or bequest transferred to a skip person after subtracting any GST exemption allocated to the gift or bequest at the maximum gift and estate tax rates. Each individual has a GST exemption equal to the basic exclusion amount, as indexed for inflation, for the year the gift or bequest was made. GSTs have three forms: direct skip, taxable distribution, and taxable termination. Certain transfers that are direct skips receive special treatment. If the transferred property would have been includible in the donor's estate if the donor had died immediately after the transfer (for a reason other than the donor had died within three years of making the gift), the direct skip will be treated as having been made at the end of the ETIP rather than at the time of the actual transfer. For example, if a Donor transferred her house to his granddaughter but retained the right to live in the house until her death (a retained life estate), the value of the house would be includible in the person's estate if his granddaughter died while still holding the life estate. In this case, the transfer to the granddaughter is a completed gift (a transfer of a future interest) and must be reported on the Form 709 tax return. The GST portion of the transfer would not be reported until a Donor died or otherwise gave up her life estate in the house. A direct skip is a transfer made during your life or at your death, that is, Subject to the gift or estate tax, of interest in the property, and made to a skip person. A taxable termination is the end of a trust's interest in property where the property interest will be transferred to a skip person. And a taxable distribution is any distribution from a trust to a skip person which isn't a direct skip or a taxable termination.

APPLICABLE CREDITS: A credit is an amount that reduces or eliminates the tax. The applicable credit applies to both the gift and estate tax, which equals the tax on the applicable exclusion amount. The applicable credit must be subtracted from any gift or estate tax owed. Any applicable credit used against gift tax in 1 year reduces the amount of credit that can be used against gift or estate taxes in a later year. For estates of decedents dying after December 31, 2010, The total amount of applicable credit (or exclusion) available to a person equals the tax on the basic exclusion amount plus the tax on any Deceased Spousal Unused Exclusion (DSUE) amount. The applicable exclusion amount is the total amount exempted from gift and/or estate tax and the DSUE. The DSUE amount is the remaining applicable exclusion amount from the estate of a predeceased spouse who died after December 31, 2010. The executor of the predeceased spouse's estate must have elected on a timely, and the DSUE amount is only available where an election was made on Form 706 filed by the deceased spouse's estate.

A gift is made if a tangible or intangible property (including money),

The use of property, or the right to receive income from property, is given without expecting to receive something of at least equal value in return.

A gift may have been made if something is sold for less than its full value or if a loan is made without interest or with reduced (less than market rate) interest.

Gifts will be tax-free, not exceeding the annual exclusion amount for the calendar year. An annual exclusion amount may be the same or different every year as determined by IRS (Internal revenue agency).

A taxpayer’s gift to their spouse is tax-free but can not claim a tax credit in an income tax return.

Gifts will be tax-free If the taxpayer and spouse decide to split Gifts. A taxpayer and their spouse can give up the applicable yearly exclusion $$$$* amount (as per IRS rules) to a third party. But the conditions are; First, the taxpayer needs to consider one-half of the gift from them and rest half from their spouse. Second, Both spouses must agree to split the gift, and in the case of a deceased spouse, the personal representative will act on behalf of the decedent. If there is consent to split the gift, both spouses can apply the annual exclusion to one-half of the gift. Gift splitting allows married couples to give up to $$$$* amount to a person without making a taxable gift. If a gift is split, both spouses must file a gift tax return to show an agreement to use gift splitting. This is true even if half of the split gift is less than the annual exclusion. In this case, you and your spouse must file "Form 709 United States Gift Tax Return".

Gifts will be tax-free if a taxpayer gives away gifts in the form of Tuition or medical expenses directly to a medical or educational institution for another person and usually don't need to be reported, such as if an entire interest in property if no other interest has been transferred for less than adequate consideration or for other than a charitable use and a qualified conservation contribution that is a perpetual restriction on the use of real property. Medical care includes expenses incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or to affect any structure or function of the body or for transportation primarily for and essential to medical care. Medical care also includes amounts paid for medical insurance on behalf of any individual.

Gifts will be tax-free if a taxpayer gives away gifts to a political organization for its use and usually don't need to be reported, such as if an entire interest in the property, if no other interest has been transferred for less than adequate consideration, or for other than a charitable use and a qualified conservation contribution that is a perpetual restriction on the use of the real property.

The gift tax does not apply to a transfer to any civic league or other organization, any labor, agricultural, or horticultural organization, or any business league or other organization for the use of such organization, provided that such organization is exempt from tax under Form 709, Section 501(a).

Gifts will be tax-free if a taxpayer gives away gifts to charities and usually don't need to be reported, such as if an entire interest in the property, if no other interest has been transferred for less than adequate consideration, or for other than a charitable use and a qualified conservation contribution that is a perpetual restriction on the use of the real property. You can deduct your contributions only if you make them to a qualified organization that includes nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose or that work to prevent cruelty to children or animals. Other than churches and governments, most organizations must apply to the IRS to become qualified organizations. You can ask any organization whether it is a qualified organization, and most will be able to tell you. You also can check by going to IRS.gov/TEOS.

Bonds are exempt from federal income taxes and not from federal gift taxes.

A taxpayer gifting their spouse may not be tax-free, if an interest in property that will terminate due to a future event. In this case, you will have to file "Form 709 United States Gift Tax Return", if you made any gift to your spouse of a terminable interest that does not meet the exception described in "Life estate with power of appointment," later, or if your spouse is not a U.S. citizen and the total gifts you made to your spouse during the year exceed $$$$.

THE GROSS ESTATES: It includes the value of all property the decedent owns partially or in full at the time of death, including below

1. The life insurance proceeds are payable to the estate or to his or her heirs if the decedent owned the policy.

2. The value of some annuities payable to the estate or the decedent's heirs.

3. The amount of a specific property the decedent transferred within 3 (three) years before death.

ALLOWABLE DEDUCTIONS: It is used in determining the taxable estate, including:

1. Funeral expenses are paid out of the estate.

2. Debts the decedent owed at the time of death.

3. The marital deduction (generally, the value of the property that passes from the estate to the surviving spouse).

4. The charitable deduction from the decedent's estate to any state or subdivision of the USA, the District of Columbia, or to a qualifying charity for exclusively charitable purposes.

5. The state death tax deduction may include any estate, inheritance, legacy, or succession taxes paid due to the decedent's death to any state or the District of Columbia.
    

You did not give more than annual exclusion $$$$* to anyone donee.

All the gifts you made were of present interest.

If the only gifts you made during the year are deductible as gifts to charities, you do not need to file a return as long as you transferred your entire interest in the property to qualifying charities. If you transferred only a partial or part of your interest to someone other than a charity, you must still file a return and report all of your gifts to charities. If you must file a return to report noncharitable gifts and made gifts to charities, you must include all of your gifts to charities on the return. (See Publications 526 Charitable contributions For preparing YYYY return).

If you gave gifts to someone in the calendar year totaling more than the annual exclusion amount $$$$* (other than to your spouse), you probably must file Form 709. But see Transfers Not Subject to Gift Tax and Gifts to Your Spouse.

Certain gifts, called future interests, are not subject to the annual exclusion $$$$*, and you must file Form 709 even if the gift was under annual exclusion $$$$*.

If a gift is of community property, each spouse considers it made one-half. For example, $50,000 of community property is considered a gift of $25,000 made by each spouse, and each spouse must file a gift tax return.

The donor's executor must file the return if a donor dies before filing a return.

You must report on Form 709 the GST tax imposed on inter vivos direct skips. An inter vivos direct skip is a transfer made during the donor's lifetime, that is; (a) Subject to the gift tax, (b) Of interest in the property, and (c) Made to a skip person.

FORM 706: An estate tax return must be submitted if the gross estate, plus any adjusted taxable gifts (which are the total of the taxable gifts made by the decedent after 1976) that aren't included in the gross estate and the specific gift tax exemption (applies only to gifts made after September 8, 1976, and before January 1, 1977) is more than the basic exclusion amount for the year of the death. However, a complete and timely filed return is required if a deceased spouse's estate elects portability of any unused exclusion amount for use by the surviving spouse. For decedents who died in YYYY, Form 706 must be filed by the executor of the estate of every U.S. citizen or resident to report estate and/or GST tax within 9 (nine) months after the date of the decedent's death. If you cannot submit Form 706 by the due date, you may receive an extension of time to file. Use Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, to apply for an automatic 6-month extension of time to file.

1. Whose gross estate, plus adjusted taxable gifts and a specific exemption, is more than $$$$* and the adjusted taxable gifts (as defined in section 2503) made by the decedent after December 31, 1976, and the total specific exemption allowed under section 2521 (as in effect before its repeal by the Tax Reform Act of 1976) for gifts made by the decedent after September 8, 1976; and

2. Whose executor elects to transfer the DSUE amount to the surviving spouse, regardless of the decedent's gross estate size.

FORM 706-NA: Decedents who were neither U.S. citizens nor U.S. residents at the time of death, the executor to file Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return, Estate of nonresident not a citizen of the United States.

FORM 1040: Executor to file the final tax return, including a certified copy of the Last Will. If the decedent was a citizen or resident of the United States and died testate (leaving a valid Last Will), attach a certified copy of the will to the return. If you cannot obtain a certified copy, attach a copy of the Last Will and explain why it is not certified. Other supplemental documents may be required, as explained later. If the decedent was a U.S. citizen but not a resident of the United States, then the requirements are different. You may face one or more of the following situations, so follow the instructions as an executor.

1. In general, the final individual income tax return of a decedent is prepared and filed in the same manner as when they were alive. All income up to the date of death must be reported, and all credits and deductions to which the decedent is entitled may be claimed. File the return using Form 1040.

2. If the decedent has not done so, you may also have to file individual income tax returns for years preceding the year of death. You may learn from the IRS correspondence you find in their records that the decedent has not filed the required returns. You may also obtain verification of the decedent's non-filing and certain income documents from the IRS using IRS Form 4506-T, Request for Transcript of Tax Return.

3. If tax is due on the decedent’s individual income tax return for the year of death or on any returns you file for preceding years, submit payment with the return.

4. If the decedent is due a refund of any individual income tax (Form 1040), you may claim that refund using IRS Form 1310, Statement of a Person Claiming Refund Due a Deceased Taxpayer.

FORM 1041: The fiduciary of a domestic decedent's estate, trust, or bankruptcy estate uses Form 1041 to report the following.

1. The income, deductions, gains, losses, etc., of the estate or trust;

2. The income is either accumulated or held for future distribution or distributed currently to the beneficiaries.

3. Any income tax liability of the estate or trust.

4. Employment taxes on wages paid to household employees.

5. Net Investment Income Tax. See Schedule G, line 4, and the Instructions for Form 8960
    

FUTURE INTEREST: A gift is considered a future interest if the donee's rights to the property's use, possession, enjoyment, or income from the property will not begin until some future date. Future interests include reversions, remainders, and other similar interests or estates.

PRESENT INTEREST: Contributions to a qualified tuition program (QTP) for a designated beneficiary do not qualify for the educational exclusion. For example, a contribution to a QTP on behalf of a designated beneficiary is considered a gift of a present interest.