Berkeley CSUA MOTD:Entry 40854
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2005/12/5-7 [Reference/Tax] UID:40854 Activity:low
12/5    Say I buy a house and my parents wire in the down pay.
        The down pay over $11,000 is subject to the gift tax. But
        what if they add their names to the title of the property,
        is that still subject to gift tax?
        \_ Talk to your mortgage agent.  They know how to solve these issues.
          \_ no.
             \_ they have no clue on this matter.  talk to your
                accountants.
                \_ Even if they have a clue, they are legally barred from
                   giving such advise to you because their relationships to you
                   are real estate / mortgage agents, not tax advisers.  But
                   you can try to pursuade them to tell you off the record as
                   friends.
        \_ Yes, the gift tax applies to goods and real estate as well as
           money.  But if you give them ownership of the house concommitant
           to the amount they contributed, it's not a gift.  But that would
           mean that when you sell, they would get part of the proceeds.  It
           also means that they're liable for the mortgage.  -tom
           \_ Could they then gift you an $11,000 portion of the title every
              year until they have no remaining interest? -gm
              \_ Yes, they can gift the equity back $11K at a time.
                 \_ technically, yes.  but each time you redistribute the
                    ownership, you need to re-assess the house which of
                    is not free!
                    \_ And if that reassessment triggers a change in your tax
                       assessment, you're probably better off paying the gift
                       tax.
        \_ Talk to a professional.  Do not take financial, medical, or legal
           advice from motd cranks.
        \_ you should talk to an accountant to make your final decision.
           however, it's good that you get some background information
           first so you will ask good and useful questions.
        \_ They don't really have to pay any tax yet, but it will reduce
           the amount of tax free gains will be in their estate when they
           die. Talk to an accountant about all this.
        \_ Use the "unified (tax) credit"  http://csua.org/u/e6c
           This makes the most sense.  I am very surprised no one earlier
           suggested this.  Your parents do not need to be dead to use this.
           IRS example:  http://www.irs.gov/publications/p950/ar02.html#d0e260
           Your parents file form 709 (just like it says on irs.gov) to tell
           the IRS they're using part of their unified credit.
           \_ Uh, this is what I was referring to in the entry directly
              above yours.
              \_ Okay, I'll give you half-credit for this question.
                 -your Physics TA
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csua.org/u/e6c -> law.freeadvice.com/tax_law/estate_tax_law/unified_tax_credit.htm
Click He re For Other Legal Topics | What is the unified tax credit all about? And, if you are married, your spouse (also a US citizen) has the same exemption credit, so that you can, as a couple, give a full $3 million to your heirs free of Esta te Tax. Though the estate tax is repealed for 2010, it is resurrected in 2011 and the estate tax exemption will be $1,000,000. Wh ile the federal estate tax is increased in stages and repealed, the gift tax is fixed at $1,000,000 and remains in existence in 2010, the year o f the repeal of the federal estate tax. This credit is referred to as the "unified" credit because federal Gift a nd Estate Taxation are integrated into one unified tax system. There is no Estate Tax on the first $1,500,000 (or the current exemption level) o f your combined taxable gifts and transfers at death. You ante up when t he sum reaches over $1,500,000 (or the current exemption amount). BBBOnLine Reliability Seal FreeAdvice is the leading legal site for consumers and small businesses. It provides general legal information t o help people understand their legal rights in 130+ legal topics, but is not a substitute for personal legal advice from an attorney.
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www.irs.gov/publications/p950/ar02.html#d0e260
Filing an Estate Tax Return Unified Credit (Applicable Exclusion Amount) A credit is an amount that eliminates or reduces tax. A unified credit ap plies to both the gift tax and the estate tax. You must subtract the uni fied credit from any gift tax that you owe. Any unified credit you use a gainst your gift tax in one year reduces the amount of credit that you c an use against your gift tax in a later year. The total amount used duri ng life against your gift tax reduces the credit available to use agains t your estate tax. Under prior law, the same unified credit amount applied to both the gift tax and the estate tax. Under current law, however, the unified credit a gainst taxable gifts will remain at $345,800 (exempting $1 million from tax) through 2009, while the unified credit against estate tax increases during the same period. The following table shows the unified credit an d applicable exclusion amount for the calendar years in which a gift is made or a decedent dies after 2003. For Gift Tax Purposes: For Estate Tax Purposes: Year Unified Credit Applicable Exclusion Amount Unified Credit Applicable Exclusion Amount 2004 and 2005 345,800 1,000,000 555,800 1,500,000 2006, 2007, and 2008 345,800 1,000,000 780,800 2,000,000 2009 345,800 1,000,000 1,455,800 3,500,000 For examples of how the credit works, see Applying the Unified Credit to Gift Tax and Applying the Unified Credit to Estate Tax, later. Gift Tax The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income fro m property, without expecting to receive something of at least equal val ue in return. If you sell something at less than its full value or if yo u make an interest-free or reduced interest loan, you may be making a gi ft. Generally, the following gifts are not taxable gifts: * Gifts that are not more than the annual exclusion for the calendar ye ar, * Tuition or medical expenses you pay directly to a medical or educatio nal institution for someone, * Gifts to your spouse, * Gifts to a political organization for its use, and * Gifts to charities. A separate annual exclusion applies to each person to whom you make a gift. Theref ore, you generally can give up to $11,000 each to any number of people i n 2004 and none of the gifts will be taxable. If you are married, both you and your spouse can separately give up to $11,000 to the same person in 2004 without making a taxable gift. If one of you gives more than $11,000 to a person in 2004, see Gift Splitting, later. After 2004, the $11,000 annual exclusion may be i ncreased due to a cost-of-living adjustment. See the instructions for Fo rm 709 for the amount of the annual exclusion for the year you make the gift. Example 1 In 2004, you give your niece a cash gift of $8,000. The gift is not a taxable gift because i t is not more than the $11,000 annual exclusion. Example 2 You pay the $15,000 college tuition of your friend. Because the payment qualifies for the educational exclusion, the gift is not a taxable gift. Example 3 In 2004, you give $25,000 to your 25-year-old daughter. The first $11,000 of your gift is not subject to the gift tax because of th e annual exclusion. As explaine d later under Applying the Unified Credit to Gift Tax, you may not have to pay the gift tax on the remaining $14,000. See Form 709 and its instructions for more informatio n about taxable gifts. Gift Splitting If you or your spouse make a gift to a third party, the gift can be consi dered as made one-half by you and one-half by your spouse. If you do, you each can take the annual exclusion for your part of the g ift. In 2004, gift splitting allows married couples to give up to $22,000 to a person without making a taxable gift. If you split a gift you made, you must file a gift tax return to show tha t you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion. Harold and his wife, Helen, agree to split the gifts that the y made during 2004. Harold gives his nephew, George, $21,000, and Helen gives her niece, Gina, $18,000. Although each gift is more than the annu al exclusion ($11,000), by gift splitting they can make these gifts with out making a taxable gift. Harold's gift to George is treated as one-half ($10,500) from Harold an d one-half ($10,500) from Helen. Helen's gift to Gina is also treated as one-half ($9,000) from Helen and one-half ($9,000) from Harold. In each case, because one-half of the split gift is not more than the annual ex clusion, it is not a taxable gift. Applying the Unified Credit to Gift Tax After you determine which of your gifts are taxable, you figure the amoun t of gift tax on the total taxable gifts and apply your unified credit f or the year. In 2004, you give your niece, Mary, a cash gift of $8,000. You pay the $15,000 college tuition of your friend, David. You give your 25-year-old daughter, Lisa, $25,00 0 You also give your 27-year-old son, Ken, $25,000. You apply the exceptions to the gift tax a nd the unified credit as follows: 1 Apply the educational exclusion. Payment of tuition expenses is not s ubject to the gift tax. The first $11,000 you give someone during 2004 is not a taxable gift. Therefore, your $8,000 gift to Mary, the first $11,000 of your gift to Lisa, and the first $11,000 of your gift to Ken are not taxable gifts. The gift tax on $28,000 ($14,000 remaining from your gift to Lisa plus $14,000 remaining from your gift to Ken) is $5,560. You subtract the $5,560 from your unified credit of $345,800 for 2004. The unified credit that you can use against the gift tax in a later year is $340,240. Filing a Gift Tax Return Generally, you must file a gift tax return on Form 709 if any of the foll owing apply. You do not have to file a gift tax return to report gifts to (or for the use of) political organizations and gifts made by paying someone's tuiti on or medical expenses. You also do not need to report the following deductible gifts made to cha rities: * Your entire interest in property, if no other interest has been trans ferred for less than adequate consideration or for other than a charitable use; or * A qualified conservation contribution that is a restriction (granted forever) on the use of real property. If you need to file a gift tax return, you should see Form 709 and its instructions. Estate Tax Estate tax may apply to your taxable estate at your death. Your taxable e state is your gross estate less allowable deductions. Gross Estate Your gross estate includes the value of all property in which you had an interest at the time of death. Your gross estate also will include the f ollowing: * Life insurance proceeds payable to your estate or, if you owned the p olicy, to your heirs; Taxable Estate The allowable deductions used in determining your taxable estate include: * Funeral expenses paid out of your estate, * Debts you owed at the time of death, and * The marital deduction (generally, the value of the property that pass es from your estate to your surviving spouse). For more information on what is included in your gros s estate and the allowable deductions, see Form 706 and its instructions . Applying the Unified Credit to Estate Tax Basically, any unified credit not used to eliminate gift tax can be used to eliminate or reduce estate tax. However, to determine the unified cre dit used against the estate tax, you must complete Form 706. Filing an Estate Tax Return An estate tax return, Form 706, must be filed if the gross estate, plus a ny adjusted taxable gifts and specific gift tax exemption, is more than the filing requirement for the year of death. Adjusted taxable gifts is the total of the taxable gifts you made after 1 976 that are not included in your gross estate. The specific gift tax ex emption applies only to gifts made after September 8, 1976, and before 1 977. The following table lists the filing requirement fo r the estate of a decedent dying after 2003. Year of Death: Filing Requirement: 2004 and 2005 1,500,000 2006, 2007, and 2008 2,000,000 2009 3,500,000 More information. If you think you will have an ...