(The information below applies to US citizens and is current as of the date written, however it is subject to change without notice. For access to further or updated information, see the Internal Revenue Service web site at http://www.irs.gov/ or a tax professional. This summary cannot fully cover the subject matter and should not be the sole basis for tax planning decisions. Consult a tax professional prior to making such decisions.)
Estate and Gift Taxes
The annual gift exclusion allows you to make gifts up to the annual exclusion amount to each of any number of people each year, and none of the gifts are subject to gift tax. The annual exclusion is periodically adjusted for inflation, and for 2006 it has increased to $12,000.
Prior to 1976, the gift tax and estate tax were independent systems. Since the gift tax was generally lower, there was incentive to make gifts during one's lifetime rather than transfers at death. In 1976, Congress unified the two systems. The gift tax credit, currently $345,800, shelters $1,000,000 worth of the cumulative amount of that portion of gifts exceeding the annual exclusion, but uses up that amount of the lifetime gift tax credit. Since the systems are now unified, any portion of the gift tax credit that is used during life is deducted from the available estate tax credit at death.
As part of the tax structure that existed in the beginning of 2001, the gift and estate tax exclusions were scheduled to increase to $1,000,000 in 2006. However, during 2001 the gift and estate tax structure underwent major changes as part of legislation called the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA-2001). Under this legislation, the gift and estate tax exclusions increased to $1,000,000 for 2002, and the maximum tax rate decreased. According to EGTRRA-2001, the gift tax exclusion remains at $1,000,000 through 2010, however the maximum gift tax rate declines in stages to 35% in 2010. The estate tax exclusion increases and the tax rate decreases in stages through 2009, and is repealed entirely in 2010. However, these changes must be considered temporary as the legislation is scheduled to "sunset" at the beginning of 2011. This means that unless Congress takes action to extend the tax structure, or enacts successor legislation with a new structure, the gift and estate tax structure will revert to the plan as it existed in 2001. This sunset provision creates a good deal of uncertainty regarding what will happen to the tax structure in 2010, 2011, and beyond.
For a summary of the gift and estate tax credits, exclusions, and maximum rates under EGTRRA-2001, please see the table below:
Estate and Gift Tax Exclusions
- Annual exclusion is currently $12,000 for 2006
- There is some uncertainty regarding what will happen in 2010, 2011, and beyond
| Year | Maximum | Gift Tax | Gift Tax | Maximum | Estate Tax | Estate Tax |
| 2001 | 55% | $220,550 | $675,000 | 55% | $220,550 | $675,000 |
| 2002 | 50% | $345,800 | $1,000,000 | 50% | $345,800 | $1,000,000 |
| 2003 | 49% | $345,800 | $1,000,000 | 49% | $345,800 | $1,000,000 |
| 2004 | 48% | $345,800 | $1,000,000 | 48% | $555,800 | $1,500,000 |
| 2005 | 47% | $345,800 | $1,000,000 | 47% | $555,800 | $1,500,000 |
| 2006 | 46% | $345,800 | $1,000,000 | 46% | $780,800 | $2,000,000 |
| 2007 | 45% | $345,800 | $1,000,000 | 45% | $780,800 | $2,000,000 |
| 2008 | 45% | $345,800 | $1,000,000 | 45% | $780,800 | $2,000,000 |
| 2009 | 45% | $345,800 | $1,000,000 | 45% | $1,455,800 | $3,500,000 |
| 2010 | 35% | $345,800 | $1,000,000 | 0% | unlimited | unlimited |
| 2011 | 55% | $345,800 | $1,000,000 | 55% | $345,800 | $1,000,000 |
