Tax Help - Dealing With Estate Tax

If you gave someone gifts valued more than $12,000, you must report the total gift to the IRS and may have to pay tax on the gifts. If you're Married Filing Jointly, the tax-free amount doubles to $24,000. If you or your spouse make a gift to a third party, the gift can be considered as made half by you and half by your spouse (known as gift splitting).

The person who receives your gift doesn't have to report it to the IRS or pay gift or income tax on its value.

Taxable Gifts

Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift. There are some exceptions to the tax rules on gifts. The following gifts don't count against the annual limit:

tuition or medical expenses you pay directly to an educational or medical institution for someone's benefit
gifts to your spouse
gifts to a political organization
charitable donations

Estate Tax

The money and property you own when you die (your estate) may be subject to federal estate tax if the estate is worth more than the applicable exclusion amount.

Most relatively simple estates (cash, publicly traded securities, small amounts of other, easily valued assets, and no special deductions or elections or jointly held property) with a total value under $2 million and a date of death in 2006 or 2007 do not require the filing of an estate tax return.

Additionally, the person who receives your estate generally won't have to pay an estate tax or an income tax on the value of the inheritance.

Reduced Tax on Appreciated Securities

If you give your child appreciated securities (such as stock or mutual fund shares), the tax bill on the increase in value is passed on to the child along with the gift.

For example, stock you bought for $2,500 is now worth $5,000. If you sold the stock, you'd owe tax on the $2,500 gain. The 15% rate on long-term capital gains means it would cost you $375.

If you gave the shares to your child, the same $2,500 would be taxed, but at your child's rate. His or her income may be low enough to allow him or her to be taxed at the 5% long-term capital gains rate. If that's the case, the tax bill would be reduced to $125.