Estate Planning: Guide to Federal Estate & Gift Tax

Understanding how federal estate tax and gift taxes work is essential if you are planning on passing your estate onto your beneficiaries. Here are a few things to consider about federal estate and gift taxes.

Estate Tax Exemption

Whenever you die, you will inevitably past your estate onto your beneficiaries. Depending on how big your estate is, a tax might be incurred on the estate before it is allowed to pass on to your beneficiaries. This is going to depend on how big the estate tax exemption is whenever you pass away. For example, let's say that the estate tax exemption is $1 million. If you have an estate that is less than this amount, your beneficiaries will not have to pay a dime in estate taxes. However, if you have an estate that is worth $5 million, they are only going to be able to receive the first $1 million tax-free. After that, the next $4 million will be taxed at the estate tax rate. The estate tax exemption as fluctuated from one year to the next based on changes in the government. In 2010, there is no estate tax to worry about. However, in 2011, the estate tax is scheduled to come back and will impact those that plan on passing on their estate to beneficiaries.

Gift Tax Exclusion

If you decide to give assets to a beneficiary before you pass away, you may have to worry about gift taxes. If you are an individual, you can give as much as $13,000 per year to someone else without having to pay taxes on it. If you are married, you can combine both of your exemptions to a total of $26,000 per year. If you give more than that amount, you will have to pay gifts taxes on the overage. However, you should keep in mind that certain gifts are not taxable. If you give money to a charity, this is not taxable. If you pay for the medical expenses of a loved one directly to the medical facility, you will not have to pay taxes. You can also avoid taxes by paying for the tuition of a college student.

If you choose to give gifts above $13,000, you have a $1 million lifetime limit. For example, if you decide to give someone $20,000 one year, $7000 of that money is going to apply towards your $1 million lifetime maximum. Once you reach that maximum, you will have to pay taxes on the amount.

Tax Rates

Currently there is no tax rate for estate taxes. However, in the past it has been approximately 45 percent. After 2010, it should return to approximately those levels. The gift tax rate is the same rate at 45 percent. Therefore, regardless of whether you try to give your estate away before you pass away or when you die, you are going to have to pay taxes at the same rate.

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