2010 Gift Tax Calculations Yield Interesting Results
An interesting result of the 2010 decrease in the gift tax rate followed by a likely increased gift tax rate in 2011 is that donors can make a taxable gift in 2010 that, at first glance, would appear to use all of their exemption, but in fact would leave a small amount of exemption for use in 2011 or thereafter. This is because, although the sheltered amount is often thought of in terms of an "exemption," it is actually a credit, and the unified gift tax credit decreased from $345,800 in 2009 to $330,800 in 2010 as a result of the drop in the top rate from 45% to 35%. If the rates in 2011 return to their 2009 levels, the credit would again become $345,800 (a $15,000 increase over the 2010 credit amount). This would allow a donor who has used her entire $330,800 credit as it existed in 2010 to make up to $36,585 of additional taxable gifts in 2011 without gift tax, since that is the amount of taxable gifts that would absorb that $15,000 of additional credit (i.e., $36,585 multiplied by the 41% marginal rate that would be applicable to gifts over $1,000,000 but not over $1,250,000 = $15,000). Under this scenario, a husband and wife who elect to split gifts would therefore be able to make combined taxable gifts of $73,170 in 2011 without gift tax. This is yet another reason why some people may consider making larger gifts in 2010 that utilize their entire $330,800 credit (but note the caveat immediately below for donors who have made pre-2010 gifts in excess of $500,000).
Another important result of the lower credit in 2010 can be thought of as the reverse of the above; that is, some donors may think they have more "exemption" remaining in 2010 than they actually have. Donors who have made pre-2010 taxable gifts in excess of $500,000 cannot make taxable gifts in 2010 of the full difference between $1,000,000 and the prior taxable gifts without paying some gift tax! This is because the pre-2010 taxable gifts in excess of $500,000 used the credit at a greater rate (starting at 37%) than the 35% top rate applicable in 2010. For example, if a donor made $750,000 of pre-2010 taxable gifts, she would have used $248,300 of her credit, leaving $82,500 of credit remaining in 2010. If she were to make $250,000 of taxable gifts in 2010, thinking that's the amount of "exemption" she has remaining, she would actually owe $5,000 of gift tax. If she did not want to pay any gift tax, she would have needed to limit her gift to $235,714.