Cash Gifting Programs and Legal Issues

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Department of the Treasury Internal Revenue ServicePublication 950
(Rev. August 2007)
Cat. No. 14447XIntroductionto Estate and GiftTaxes

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What's New
The provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 made a number of changes tothe estate tax and the gift tax rates and to the applicableexclusion amounts.

• The top marginal tax rate applicable to estate andgifts has decreased from 46 percent in 2006 to 45percent in 2007, and will remain at that rate for2008 and 2009.

• The estate tax has been repealed for 2010 and the highest gift tax rate will be decreased to 35 percentfor 2010. The changes to the applicable exclusion amounts are discussed later in this publication.

• The provisions for these changes are currently setto expire for estates of decedents dying and gifts made after December 31, 2010. Introduction If you give someone money or property during your life, you may be subject to federal gift tax. The money andproperty you own when you die (your estate) may besubject to federal estate tax. The purpose of this publicationis to give you a general understanding of when these taxes apply and when they do not. It explains how much money or property you can give away during your life time or leave to your heirs at your death before any tax will beowed. Gifts you make during your life or bequests from your estate can also be subject to an additional tax, the generation-skipping transfer (GST) tax, if the gifts or bequests are to a person, such as a grandchild, who ismore than one generation younger than you.No tax owed. Most gifts are not subject to the gift taxand most estates are not subject to the estate tax. Forexample, there is usually no tax if you make a gift to yourspouse or to a charity or if your estate goes to yourspouse or to a charity at your death. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual

Page 2 Publication 950 (August 2007)exclusion for the year.
See Annual exclusion under GiftTax, on page 6.

Even if tax applies to your gifts or your estate, it maybe eliminated by the unified credit, discussed later.  No return needed. Gift tax returns are filed annually.  However, you do not need to file a gift tax return unless you give someone, other than your spouse, money or property worth more than the annual exclusion (discussedon page 6) for that year, or a gift not subject to the annual exclusion. An estate tax return generally will notbe needed unless the estate is worth more than theapplicable exclusion amount for the year of death. Thisamount is shown in the table under Unified Credit (ApplicableExclusion Amount), on page 4.  No tax payable by the person receiving your gift or estate. The person who receives your gift or your estate will not have to pay any federal gift tax or estate tax because of it. Also, that person will not have to pay income tax on the value of the gift or inheritance received.  No income tax deduction. Making a gift or leavingyour estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitablecontributions).  What this publication contains. If you are not sure whether the gift tax, the estate tax, or the generation-skipping transfer tax applies to your situation, the rest of this publication may help you. It explains in generalterms:

• When tax is not owed because of the unified credit,

• When the gift tax does and does not apply,

• When the estate tax does and does not apply, Publication 950 (August 2007) Page 3

• When to file a return for the gift tax or the estate tax, and

• When the generation-skipping transfer tax may apply.

This publication does not contain any informationabout state or local taxes. That information should beavailable from your local taxing authority. Where to find out more. This publication does not contain all the rules and exceptions for federal estate and gift taxes. It does not contain the rules that apply to nonresident aliens.

If you need more information, see thefollowing publication, forms, and instructions:

• Publication 559, Survivors, Executors, and Administrators;

• Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return;

• Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return; and

• Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return, Estate of nonresident, not a citizen of the United States.  

To order these forms, call 1-800-TAX-FORMS(1-800-829-3676). If you have access to TTY/TDD equipment,you can call 1-800-829-4059. To get these formsusing your personal computer, go to www.irs.gov.  Unified Credit (ApplicableExclusion Amount)  A credit is an amount that eliminates or reduces tax. Aunified credit applies to both the gift tax and the estatetax. You must subtract the unified credit from any gift taxthat you owe. Any unified credit you use against your gifttax in 1 year reduces the amount of credit that you canPage 4 Publication 950 (August 2007) use against your gift tax in a later year. The total amount used during life against your gift tax reduces the creditavailable to use against your estate tax.  The unified credit against taxable gifts will remain at$345,800 (exempting $1 million from tax) through 2009,while the unified credit against estate tax increases duringthe same period. The following table shows the unified credit and applicable exclusion amount for thecalendar years in which a gift is made or a decedent diesafter 2001.For Gift Tax For Estate TaxPurposes: Purposes:Applicable ApplicableUnified Exclusion Unified ExclusionYear Credit Amount Credit Amount2002 and345,800 1,000,000 345,800 1,000,00020032004 and345,800 1,000,000 555,800 1,500,00020052006,2007, and 345,800 1,000,000 780,800 2,000,00020082009 345,800 1,000,000 1,455,800 3,500,000For examples of how the credit works, see Applying theUnified 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), orthe use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.  Publication 950 (August 2007) Page 5The general rule is that any gift is a taxable gift.  However, there are many exceptions to this rule.

Generally, the following gifts are not taxable gifts:
• Gifts, excluding gifts of future interests, that are notmore than the annual exclusion for the calendaryear,
• Tuition or medical expenses you pay directly to amedical or educational institution for someone,• Gifts to your spouse,
• Gifts to a political organization for its use, and
• Gifts to charities.Annual exclusion. A separate annual exclusion appliesto each person to whom you make a gift. In 1998,the gift tax annual exclusion became subject tocost-of-living increases. The exclusion for 1998 through2001 was $10,000 and for 2002 through 2005 the exclusionwas $11,000. For 2006 and 2007 the amount is$12,000. Thus, in 2007, you generally can give up to$12,000 each to any number of people in 2007 and none of the gifts will be taxable. 

However, gifts of future interests cannot be excludedunder the annual exclusion provisions. A gift of a future interest is a gift that is limited so that its use, possession,or enjoyment will begin at some point in the future. If you are married, both you and your spouse can separately give up to $12,000 to the same person in 2007 without making a taxable gift.

If one of you gives more than $12,000 to a person in 2007, see Gift Splitting, later.Inflation adjustment. The annual exclusion may be increased due to cost-of-living adjustments. See the instructionsfor Form 709 for the amount of the annual exclusion for the year you make the gift. 

Example 1. In 2007, you give your niece a cash giftof $8,000. It is your only gift to her this year. The gift is not a taxable gift because it is not more than the $12,000annual exclusion.Page 6 Publication 950 (August 2007)Example 2. You pay the $15,000 college tuition ofyour friend. Because the payment qualifies for the educationalexclusion, the gift is not a taxable gift.Example 3. In 2007, you give $25,000 to your25-year-old daughter. The first $12,000 of your gift is notsubject to the gift tax because of the annual exclusion.  The remaining $13,000 is a taxable gift. As explained later under Applying the Unified Credit to Gift Tax, youmay not have to pay the gift tax on the remaining$13,000. However, you do have to file a gift tax return.  More information. See Form 709 and its instructions for more information about taxable gifts. 

Gift Splitting: If you or your spouse make a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both ofyou must consent (agree) to split the gift. If you do, you each can take the annual exclusion for your part of thegift.  In 2007, gift splitting allows married couples to giveup to $24,000 to a person without making a taxable gift.  If you split a gift you made, you must file a gift tax return to show that 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.

Example. Harold and his wife, Helen, agree to splitthe gifts that they made during 2007. Harold gives his nephew, George, $21,000, and Helen gives her niece,Gina, $18,000. Although each gift is more than the annualexclusion ($12,000), by gift splitting they can make these gifts without making a taxable gift.  Harold's gift to George is treated as one-half($10,500) from Harold and one-half ($10,500) fromHelen. 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 morethan the annual exclusion, it is not a taxable gift. However,each of them must file a gift tax return.

Publication 950 (August 2007) Page 7 Applying the Unified Credit to Gift Tax After you determine which of your gifts are taxable, you figure the amount of gift tax on the total taxable gifts and apply your unified credit for the year.

Example. In 2007, you give your niece, Mary, acash gift of $8,000. It is your only gift to her this year. Youpay the $15,000 college tuition of your friend, David. Yougive your 25-year-old daughter, Lisa, $25,000. You also give your 27-year-old son, Ken, $25,000. Before 2007,you had never given a taxable gift.

You apply the exceptions to the gift tax and the unified credit as follows:
1. Apply the educational exclusion. Payment of tuitionexpenses is not subject to the gift tax. Therefore,the gift to David is not a taxable gift.
2. Apply the annual exclusion. The first $12,000 yougive someone during 2007 is not a taxable gift.Therefore, your $8,000 gift to Mary, the first$12,000 of your gift to Lisa, and the first $12,000 ofyour gift to Ken are not taxable gifts.
3. Apply the unified credit. The gift tax on $26,000($13,000 remaining from your gift to Lisa plus$13,000 remaining from your gift to Ken) is $5,120.

See the Instructions for Form 709 for the Table forComputing Gift Tax for further information. Yousubtract the $5,120 from your unified credit of$345,800 for 2007. The unified credit that you canuse against the gift tax in a later year is $340,680.You do not have to pay any gift tax for 2007. However,you do have to file Form 709. 

Filing a Gift Tax Return Generally, you must file a gift tax return on Form 709 if any of the following apply.
• You gave gifts to at least one person (other thanyour spouse) that are more than the annual exclusionfor the year.Page 8 Publication 950 (August 2007)
• You and your spouse are splitting a gift.
• You gave someone (other than your spouse) a giftof a future interest that he or she cannot actuallypossess, enjoy, or receive income from until sometime in the future.
• You gave your spouse an interest in property thatwill be ended by some future event.You do not have to file a gift tax return to report gifts to(or for the use of) political organizations and gifts madeby paying someone's tuition or medical expenses.You also do not need to report the following deductiblegifts made to charities:
• Your entire interest in property, if no other interesthas been transferred for less than adequate considerationor for other than a charitable use; or
• A qualified conservation contribution that is a restriction(granted forever) on the use of real property.

More information:
If you need to file a gift tax return,you should see Form 709 and its instructions.  Estate TaxEstate tax may apply to your taxable estate at your death. Your taxable estate is your gross estate less allowable deductions.  Gross EstateYour 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 following:
• Life insurance proceeds payable to your estate or,if you owned the policy, to your heirs;
• The value of certain annuities payable to your estateor your heirs; andPublication 950 (August 2007) Page 9
• The value of certain property you transferred within3 years before your death.Taxable EstateThe allowable deductions used in determining your taxableestate include:
• Funeral expenses paid out of your estate,
• Debts you owed at the time of death,
• The marital deduction (generally, the value of theproperty that passes from your estate to your survivingspouse),
• The charitable deduction (generally, the value ofthe property that passes from your estate to theUnited States, any state, a political subdivision of astate, or to a qualifying charity for exclusively charitablepurposes), and
• The state death tax deduction (generally any estate,inheritance, legacy, or succession taxes paidas the result of the decedent's death to any stateor the District of Columbia.More information.

For more information on what is included in your gross estate and the allowable deductions,see Form 706 and Form 706-NA and their instructions.Applying the Unified Credit to Estate Tax Basically, any unified credit not used to eliminate gift taxcan be used to eliminate or reduce estate tax. However, to determine the unified credit 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 grossestate, plus any adjusted taxable gifts and specific gift Page 10 Publication 950 (August 2007)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 1976 that are not included in your gross estate.

The specific gift tax exemption applies only togifts made after September 8, 1976, and before 1977.  Filing requirement. The following table lists the filingrequirement for the estate of a decedent dying after2001.  FilingYear of Death: Requirement:2002 and 2003 . . . . . . . . . . . . . . 1,000,0002004 and 2005 . . . . . . . . . . . . . . 1,500,0002006, 2007, and 2008 . . . . . . . . . 2,000,0002009 . . . . . . . . . . . . . . . . . . . . 3,500,000More information.

If you think you will have an estate on which tax must be paid, or if your estate will have to file an estate tax return even if no tax will be due, seePublication 559, Form 706, Form 706-NA, and the forms'instructions for more information. You can get publications and forms from the IRS website, which is www.irs.gov.

You (or your estate) may want to get a qualified estate tax professional to help with estate tax questions.Generation-Skipping Transfer TaxThe GST tax may apply to gifts or direct skips occurring at your death to skip persons. The GST tax is calculated on the value of the gift or bequest, after subtraction of any allocated GST exemption, at the maximum estate tax rate for the year involved. Each individual has a GST exemption equal to the applicable exclusion amount for the year involved.Publication 950 (August 2007) Page 11

A direct skip is a transfer made during your life or occurring at your death that is:
• Subject to the gift or estate tax,
• Of an interest in property, and
• Made to a skip person. A skip person is generally a person who is assigned toa generation that is two or more generations below thegeneration assignment of the donor.
For instance, your grand child will generally be a skip person to you or yourspouse. The GST tax is computed on the amount of the gift or bequest transferred to a skip person, after subtraction of any GST exemption allocated to the gift or bequest at the maximum gift and estate tax rates.
More information.
If you think you will have a gift orbequest on which GST tax must be paid, see Form 709,Form 706, Form 706-NA, and the forms' instructions formore information. You can get publications and forms from the IRS website, www.irs.gov. You (or your estate)may want to get a qualified estate tax professional to help with the GST questions.Page 12 Publication 950 (August 2007)