If you gift someone money or property during your life, you may be qualify to be subjected to federal gift tax. When you die, the money and property you own - otherwise known as your estate -- may be subject to federal estate tax. Additionally, the gross income of your estate could be subject to federal income tax.
There is a threshold of how much money or property you can gift during your lifetime or leave to your heirs after death before a tax will be owed. If the gifts or bequests are to a person who is more than one generation younger than you, such as a grandchild, the gift can also be subject to the generation-skipping transfer (GST) tax.
Most gifts and estates are not subject to the gift tax and estate tax. For instance, there is normally no tax if you make a gift to your spouse or to a charity before your death, or if you give your estate to your spouse or to a charity after your death. The gift tax usually does not apply if you make a gift to someone aside from your spouse or a charity unless the value of the gifts you give that person is greater than the annual exclusion for the year.
In general, the receiver of your your gift or bequest will not be required to pay any federal gift tax or estate tax because of it. In addition, that person will not have to pay income tax on the value of the gift or inheritance received. Covered gifts or bequests received from expatriates after June 16, 2008, however, may be subject to tax. The IRS recommends you consult a tax adviser for more information.
Ordinarily, giving a gift or leaving your estate to your heirs will not affect your federal income tax. Other than charitable deductions, you cannot deduct the value of gifts you make.
Due to the Economic Growth and Tax Relief Reconciliation Act of 2001, a number of changes were been made to the estate tax and the gift tax rates and to the exclusion amounts. For instance, the top marginal tax rate applied to estates and gifts decreased from 46 percent to 45 percent and will stay at that rate through 2009. The estate tax was repealed for 2010, and the gift tax rate will be lowered to 35 percent for 2010. These rates will expire on December 31, 2010.