Gift Tax in 2010

Should you consider making a taxable gift before December 31, 2010? As you may know, the gift tax rate is scheduled to rise from 35 percent in 2010 to 55 percent in 2011.

Background Information

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) repealed the federal estate tax for 2010. While the act did not repeal the gift tax for 2010, the maximum tax rate was reduced from 45 percent to 35 percent for gifts made in 2010.

Reasons for Making Taxable Gifts

One reason you may consider making a taxable gift in 2010 obviously has to do with the reduction in the maximum tax rate. Another reason has to do with the fact that the gift tax is “tax exclusive” compared to the estate tax which is “tax inclusive.” What this means is that when you make a gift to someone, the amount of the gift is not reduced by the amount of the tax you were required to pay. This is significant because the full value of the assets you gift can now grow outside of your taxable estate.

Prepaying Gift Taxes

With the gift tax rate scheduled to rise from 35 percent 55 percent in 2011, you should understand the benefits of prepaying the taxes in 2010. By way of example, assume you have $3 million available to gift. Assume also that the 55 percent marginal estate tax rate will apply in 2011. You could make a $2,222,222 gift and pay the required tax of $777.777. A bequest of $3 million after 2010 would be reduced by a 55 percent estate tax of $1,650,000. The net result is that you could transfer $872,222 more ($2,222,222 – 1,350,000) by making a taxable gift. Note: Tentative tax amounts are before unified credit.

Timing of Taxable Gifts

If you understand the benefits of making a taxable gift in 2010, you need to consider the timing to avoid having it brought back into your estate under the three year rule.