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Page 18 of 22 |
What is the unified estate and gift tax credit and how does it reduce my gift taxes? |
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In 2001, every American received a "credit" against federal Estate and Gift Taxes of $220,550 which was equivalent to transferring $675,000 tax free to your heirs. And, if you were married, and your spouse (if an American) also used the $675,000, you may, as a couple, give $1.35 million to your heirs free of Estate Tax. Beginning in 2006, 2007, 2008, the amount you can pass tax free to your heirs increases $2 million and then to $3.5 million in 2009. In 2010, the estate tax (but not the gift tax) expires; in 2011, the estate tax again becomes effective at the 2002 exemption level for deaths occurring in 2011 and thereafter.
This credit is referred to as the "unified" credit because federal gift and Estate Taxation are integrated into one unified tax system. There is no Estate or Gift Tax on the first $780,800 of your taxable gifts and transfers at death. You ante up when the sum reaches over $780,800. For example, suppose you give $25,000 to your sister in 2006 as a gift during your life. The first $12,000 of your $25,000 gift is tax-free. You will either pay a Gift Tax on the excess over $12,000 or take advantage of the $780,800 unified credit to avoid paying the tax on your gift-giving. Using the latter option will reduce the amount available to offset the Estate Tax upon your death. On the other hand, if you report and pay the tax, and later die, these previously taxed gifts are added back to your estate, the Estate Tax recalculated, and the amount of Gift Taxes you previously paid on the excess are credited against any final Estate Tax due. |
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