Estate and Gift Tax
| Author | Jeffrey Wilson |
| Pages | 693-696 |
Page 693
Estate and gift taxes are a statutory method of taxation that are imposed on large transfers of money and/or property during an individual's lifetime or at death. Gift taxes are imposed on transfers made during an individual's lifetime. Estate taxes are imposed on transfers made as a result of death. Most gifts are not subject to the gift tax and most estates are not subject to the estate tax. According to the Internal Revenue Service, only about 2 percent of all estates are subject to estate taxes. Estate and gift taxes are methods the government uses to limit dynastic or familial wealth. Estate taxes are sometimes called death taxes.
An alternative form of death tax is an inheritance tax, which is a tax levied on individuals receiving property from the estate. Federal law does not provide for an inheritance tax, although some states have enacted such laws. A number of individual states also have enacted estate tax laws.
Although the taxation of gifts and estates may seem complex, the calculation of estate and gift taxes is similar to the calculation of personal income taxes. As with the income tax, there are exemptions and credits that are applied before the progressive rate schedule is applied. Estate taxes are different in that they are calculated over a lifetime, rather than year by year.
According to the Internal Revenue Code, a person gives a gift when he gives property (including money), to another without the expectation of receiving something of approximately equal value in return. A gift may also be the use of or income from property. Selling something at less than its full value, or making an interest-free or reduced interest loan, may also constitute a gift.
Although any gift has the potential to be taxable, there are a number of exceptions. For 2005, the first $11,000 given to any one person during the calendar year is not subject to the gift tax. That amount increases to $12,000 in 2006. Educational and medical expenses paid directly to a medical or educational institution for a person will not trigger gift tax provisions. Moreover, gifts to a spouse, a political organization, or charities are generally also exempt.
Page 694
A separate $11,000 annual exclusion ($12,000 beginning in 2006) applies to each person to whom a gift is made. A person may give up to $11,000 each to any number of people each year and none of the gifts will be taxable. Married people can separately give up to $11,000 to the same person each year without making a taxable gift.
If a married couple makes a gift to a third party, the gift can be considered as made one-half by each person. This is known as gift splitting. Both spouses must agree to split the gift. Gift splitting allows a married couple to give up to $22,000 to a person annually ($24,000 in 2006) without making a taxable gift. If a gift is split, the couple should file a gift tax return proving the agreement to split the gift...
To continue reading
Request your trial