This is a continuation of two previous posts. The first addressed wills and intestacy, the second addressed trusts and powers of attorney. This post will focus on gift and estate tax issues.
Terms related to Estate Tax
Federal Estate Tax – The tax on the net value of an estate enforced by the Internal Revenue Service. The tax is imposed on any amount over the Unified Credit after all deductions are taken. The current tax rate is a flat 35% on any amount over the Unified Credit. In 2013 and thereafter, the tax rate will be at least 41% and could be up to 55% of the amount exceeding the Unified Credit.
Unified Credit – The amount that can be passed transfer-tax (estate and gift) free by an individual. In 2012 the amount is $5,120,000. In 2013, the unified credit will decrease to $1,000,000. In simple terms, if you give away $1,000,000 during life, then your estate tax unified credit decreases by the $1,000,000 given during life.
Oklahoma Estate Tax – This was repealed in 2010, so there is currently no estate tax that must be paid to Oklahoma. This state estate tax should not come back into effect, but may; stay tuned for updates.
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Common Deductions against the Estate Tax: Marital Deduction – This deduction is unlimited, meaning a deceased person can give an unlimited amount to his or her spouse and the amount given will not occur taxes at the first death. If proper planning is not done, this deduction can result in higher taxes at the surviving spouses death. Charitable Deduction – This deduction is unlimited, as well. Any amount going to a qualified charity is not subject to taxation. Administrative Expenses – This deduction covers the costs related to closing an estate. State Estate Tax Deduction – The amount paid to the State for state estate taxes.
Terms related to Gift Tax
Federal Gift Tax – The tax imposed on transfers during a person’s life in excess of the Unified Credit. Like the Estate tax, there are unlimited marital and charity gifts. In 2012, the amount of tax is a flat rate of 35% on any amount exceeding the Unified Credit. In 2013 and thereafter, the tax rate will be at least 41% and could be up to 55% of the amount exceeding the Unified Credit. The Donor has to pay the tax on any taxable gifts. It is not the responsibility of the Donee.
Annual Exclusion Amount – This is the amount that can be passed from one individual to any other individual without having to be reported. The amount is currently $13,000 and is inflation adjusted in $1,000 increments. If you give a gift less than $13,000 then you do not even have to report it. Only if a gift to any one person exceeds $13,000 does a gift tax return have to be filed, and even then it only is deducted from the donor’s Unified Credit.