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Being familiar with exemptions for the gift tax and the estate tax can help you reduce your tax burden. When you pass away, you have the right to give your cash and property to the person or people of your choice. However, the property that transfers as a part of your estate may be subject to estate taxes.
To determine the amount of tax that you owe, the IRS requires the value of property included in the estate to be based on the fair market value, not the purchase price. Your entire estate's worth is calculated, including cash, property, business ownership, and other assets. Deducted from this gross estate value are the mortgages and other debts that must be paid to settle your estate. The net amount of your estate is then targeted for estate taxation.
Unified Credit
To protect the nearly 98% of American families whose estates are not of a high enough value to pay estate tax, the IRS has developed a unified credit. Over the course of your life, from 1977 forward, the amount of money you have given in gifts is added to the value of your estate. That number, the value of your estate plus the total gifts you have given, is then reduced by the unified credit. Only estates with combined gifts and gross assets exceeding $3,500,000 (an increase from $2,000,000 in 2009) will be required to pay taxes on that portion exceeding the $3.5 million mark.
If the total value of your estate plus prior year gifts do not exceed $3.5 million, you do not even have to file an estate tax return. At this exemption level, less than two percent of all Americans will be required to pay estate taxes upon their deaths, according to the IRS. If your entire estate passes to your spouse, then it is completely exempt from the estate tax.
Gift and Estate Tax Rules You Should Know
The gift tax is a tax the IRS applies when one person gives another person property or money and receives nothing in exchange for what was given. The person giving the property or cash is the one who must report and pay the taxes on the gift, although the person receiving the gift can in some cases pay the tax.
Gift taxes can be avoided with a basic understanding of the limits and exemptions allowed by the IRS. There are specific items that can be excluded from gift tax, according to the IRS. These include:
- Gifts that do not exceed the annual exclusion amount each year.
- Gifts in the form of educational expenses or medical expense payments.
- Gifts given to a spouse.
- Gifts given to a political organization.
- Certain gifts to charitable organizations.
Estate tax exemptions include payment of debts, like mortgage expenses, as well as the cost of administering the estate. Donations from the estate to charitable causes are also deductible from the gross estate and can reduce the estate tax or shift the estate into an exempt level.
