The year 2010 is a unique year for estate planning. Owing to the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, which gradually reduced the rates of estate tax over the years, there are no estate tax and generation skipping tax for the year 2010. Gift tax, the third and last tax in the unified transfer tax system, is only 35 percent and is the lowest since 1934 when the rate was 33.5 percent. Financial advisers across the U.S are urging their clients to make use of this unique opportunity; no estate and generation skipping tax for the calendar year, while also having the lowest rates for gift tax in 2010. Here, we take a look at the gift tax and reporting requirements necessary for 2010.
Laws Governing Gift Tax and Other Transfer Taxes
The laws regarding gift tax and other transfer taxes can be confusing. The federal transfer tax rates have been falling since the beginning of the century while the exemption limits went up from $1 million in 2001 to $3.5 million in 2009. Due to some quirk in the Bush Administration tax cuts, the estate tax completely disappeared in 2010. However in 2011 taxes are going back to their 2001 levels unless the congress decides to do something about it.
According to IRS, a person can gift up to $13,000 a year to any number of people without incurring a gift tax. This is in addition to a lifetime gift tax exemption of $1 million. So a person can gift $1 million to his heirs and continue to gift $13,000 a year until his death.Couples can gift up to $26,000 jointly. Gifting is thus an effective estate tax planning strategy because it reduces the value of the taxable estate. There is a catch, however. If a person dies within three years of making the gift, it will be included in the value of the estate.
Estate planning is not one of those things that people get excited about, because it reminds them of their mortality. It’s also difficult due to the frequent changes in the law and nobody seems to know what to expect in future. Some people feel that Congress will do nothing and let the taxes go back to their 2001 levels, while others anticipate that Congress will retain the 2009 rates. While it is frustrating not to know what to expect, all financial advisors are of one opinion when it comes to estate planning; they feel that anyone who is wealthy enough to be concerned about estate and gift tax should take advantage of the unique situation in 2010. However they also want their clients to postpone the decision until the end of the year to take advantage of the fact that estate tax will be nil in 2010. Let’s just hope that no billionaires die this year if only to take advantage of the zero estate taxes.
Gift Tax Reporting Requirements
All gifts other than to a spouse, totaling more than $13000 in a calender year must be reported to the IRS using form 709. Certain gifts called future interests are not subject to the $13,000 exclusion and must be reported to the IRS regardless of the value of the gift. Another interesting thing to note is that unlike income tax, it is not possible for a married couple to jointly file a gift tax return. Each individual must file his or her own form 709.
There are three types of transfers that are not subjected to a gift tax. These are transfers to political organizations, payment for qualified educational expenses on behalf of an individual, and payment for qualified medical expenses. Similarly, gifts to charities need not be reported to the IRS as long as you transfer the entire interest in a property to a qualifying charity. For transfer of a partial interest, or when a part of the interest is transferred to someone other than a charity, you need to file a return even if you are not otherwise required to file IRS Form 709.
Most people will agree that there is great joy in giving gifts to loved ones. Gifting is also a valuable estate planning tool and combined with the low rates of gift tax in 2010, it is going to be especially sweet for both the donor and the recipient.
- Instructions for filing Form 709 by IRS, https://www.irs.gov/instructions/i709/index.html.
- Publication 950, Introduction to Estate and Gift taxes, https://www.irs.gov/publications/p950/index.html.
- Frequently asked questions on gift taxes, https://www.irs.gov/businesses/small/article/0,,id=108139,00.html
Image Credit: r-z reza, https://www.flickr.com/photos/r-z/384866837/