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Federal Estate and Gift Taxes

A Federal Estate Tax Return must generally be filed for the estate of every U.S. citizen or resident whose gross estate, taxable gifts, and specific exemptions exceed $2,000,000 for decedents dying in 2006, and according to the following table if dying in succeeding years:

Decedent dying inExclusion amount
2006, 2007, and 2008$2,000,000
20093,500,000
2010repealed
20111,000,000

The Economic Growth and Tax Relief Reconciliation Act of 2001 completely phases out the federal estate and gift tax by 2010. The tax rates are lowered and the exemption is raised between 2002 and 2009, and the tax is completely eliminated in 2010. However, the post-act law will bring the Estate and Gift Tax back into existence in 2011.

A unified credit of $202,050 is available to offset both estate and gift taxes. Any part of the credit used to offset gift taxes is not available to offset estate taxes. As a result, although they are still taxable as gifts, lifetime taxable transfers no longer cushion the impact of progressive estate tax rates. Lifetime transfers and transfers made at death are combined for estate tax rate purposes.

Gift taxes are computed by applying the uniform rate schedule to lifetime taxable transfers (after deducting the unified credit) and subtracting the taxes payable for prior taxable periods. In general, estate taxes are computed by applying the uniform rate schedule to cumulative transfers and subtracting the gift taxes paid. An appropriate adjustment is made for taxes on lifetime transfers—such as certain gifts within three years of death—in a decedent's estate.

Among the deductions allowed in computing the amount of the estate subject to tax are funeral expenses, administrative costs, claims and bequests to religious, charitable, and fraternal organizations or government welfare agencies, and state inheritance taxes.

For 2005, an annual gift tax exclusion is provided that permits tax-free gifts to each donee of $11,000 for each year. A husband and wife who agree to treat gifts to third persons as joint gifts can exclude up to $22,000 a year to each donee. An unlimited exclusion for medical expenses and school tuition both paid directly to the institution for the benefit of any donee is also available in addition to the annual gift tax exclusion.

Federal Estate and Gift Taxes

Unified Transfer Tax Rate Schedule, 19971

If the net amount is: Tentative tax is:
From To Tax + % On excess over
$ 0 $ 10,000 $ 0 18 $ 0
10,001 20,000 1,800 20 10,000
20,001 40,000 3,800 22 20,000
40,001 60,000 8,200 24 40,000
60,001 80,000 13,000 26 60,000
80,001 100,000 18,200 28 80,000
100,001 150,000 23,800 30 100,000
150,001 250,000 38,800 32 150,000
250,001 500,000 70,800 34 250,000
500,001 750,000 155,800 37 500,000
750,001 1,000,000 248,300 39 750,000
1,000,001 1,250,000 345,800 41 1,000,000
1,250,001 1,500,000 448,300 43 1,250,000
1,500,001 2,000,000 555,800 45 1,500,000
2,000,001 2,500,000 780,800 49 2,000,000
2,500,001 3,000,000 1,025,800 53 2,500,000
3,000,001 and up 1,290,800 55 3,000,000
1. The estate and gift tax rates are combined in the single rate schedule effective for the estates of decedents dying, and for gifts made, after Dec. 31, 1976.
2. The tentative tax determined above is increased by an amount equal to 5% with respect to cumulative taxable transfers between $10,000,000 and $21,040,000.

Information Please® Database, © 2007 Pearson Education, Inc. All rights reserved.

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