The Effect of Charitable Gifting on Estate Tax
The gift and estate taxes are linked as part of a unified tax system in the United States. The purpose of the gift tax is to prevent avoidance of the estate tax by making a gift of an entire estate. The gift tax is calculated annually whenever taxable gifts are made, but the tax itself is not payable until death, when it is applied in calculating the estate tax. Because gifts to registered charities are generally not taxable, they have relatively little impact on the estate tax.
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Taxable Gifts
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Gifts made to a recipient in excess of the annual gift exclusion are taxable gifts that will have an effect on estate tax calculations. For the 2009 tax year, the annual gift exclusion was $13,000. Gifts of college tuition or medical expenses are not taxable even if in excess of the exclusion amount if they are paid directly to the institution. Gifts to a spouse, political campaign or a registered charity are also usually not taxable.
Taxable Estate
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A person's taxable estate consists of their gross less deductions for funeral expenses, deaths, testamentary charitable contributions and the marital deduction. The gross estate includes all the property they own at their time of death, including assets held in revocable trusts and incomplete gifts. Property can be included in the gross estate even if it is not part of the probate estate.
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Unified Gift Tax Credit
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In each year in which a taxable gift is made, you are required to submit a gift tax return on Form 706. Completing the form will allow you to calculate the amount of tax due on the gift. Rather than paying the tax, however, the amount is deducted from the unified credit for gift tax in the 2009 tax year was $345,800, or the amount of tax that would be due on a taxable gift of $1 million (the gift exclusion amount).
Unified Estate Tax Credit
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The taxable estate is used to calculate the amount of gift tax owed. A unified estate tax credit is applied against the estate tax, however, so the tax doesn't effectively apply unless the taxable estate exceeds the estate exclusion amount. For the 2009 tax year, the estate tax credit was $1,455,800, which corresponds to an exclusion amount of $3.5 million. After reducing estate tax liability by the estate tax credit, any unused portion of the gift tax credit can also be applied to the estate tax liability.
Charitable Gifting
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Many, but not all charitable gifts are tax exempt. Individual tax payers can give up to 50 percent of their gross income in a given tax year to charitable organizations, or up to 30 percent to a private foundation without facing any tax liability. Gifts in excess of these amounts become taxable, subject to the annual exclusion. Gifts where less than your full interest in the property are transferred to the charity, where the gift was given for other than charitable use, or which represent less than a perpetual restriction on land use, may incur some tax liability. Any taxable gift will reduce the amount of the unified gift tax exclusion applicable to the estate tax.
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