Gifts made during life may be subject to tax. For 1998, the law provides a $10,000 annual exclusion, which enables a donor to give any person during a calendar year tax exempt gifts of $10,000. A husband and wife can give $20,000 together in 2001 without tax even if the $20,000 is the property of only one spouse. But if the amount of the gift exceeds $10,000, a tax return must be filed even if no tax is due.
After 1998, the $10,000 annual exemption will be increased for inflation as measured by the Consumer Price Index (CPI). However, the annual exclusion will only be increased in increments of $1,000 so the CPI must first increase 10 percent from l997.
A husband and wife can give $20,000 together in 2001 without tax even if the $20,000 is the property of only one spouse. But if the amount of the gift exceeds $10,000, a tax return must be filed even if no tax is due. The yearly exclusion can be used for any number of gifts. A husband and wife, for example, may give their four children total gifts of $80,000 in 2001 without taxes. In 10 years they can give at least $800,000, more if inflation occurs.
Gifts larger than the annual exclusion will be subject to tax, and a gift tax form must be filed. The amount of the gift greater than the exclusion is subject to the same tax as an estate until the year 2004 when the gift tax will be decoupled from the estate tax provisions. It is possible to make gifts over time without any tax liability by using the annual exclusion, or to make substantial gifts with some potential tax liability but still pay no tax by using the federal gift tax credit. Additionally, gifts to a spouse are not taxable, no matter how large.
Because the gift and estate tax is a unified tax until 2004, adjustments in computing the estate tax are made if a deceased individual made taxable gifts during his or her lifetime. Added to the estate is the value of taxable gifts beyond the annual exclusion. The tax is then computed. Any gift tax that previously had been paid is subtracted from the tax. Finally, the appropriate tax credit is applied against the tax liability, as well as other available estate tax return credits.
After the year 2004 gift taxes are computed separately. The maximum total of gifts which can be made after the year 2002 with no gift tax due is $1 million. Gifts over $1 million will be taxed at the rates from 41% to 50% depending upon the year and size of the gift.