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The Tax Prophet Newsletter   Issue # 29 December, 2005


In This Issue:
Credit Increase
Annual Exclusion
Gift Tax Credit

Estate Planning Considerations
for 2006

Credit Increase

Starting January 1, 2006 and continuing through December 31, 2008, the applicable credit amount (credit) is raised to $2.0 million per person. This means that individuals with estates of $2.0 million or less will not pay federal estate taxes provided they have the full credit available. The top estate tax bracket is reduced to 46% in 2006.

For married couples who maximize their credits, estates worth less than $4.0 million will be exempt from federal estate tax.

NOTE: California does not have a separate estate or death tax.

Annual Gift Tax Exclusion

The annual gift tax exclusion applies independently of the credit and is raised from $11,000 to $12,000 per donee (recipient) per calendar year, starting January 1, 2006. A husband and wife may make a present gift of cash or property equal to $24,000 per year, per donee.

For example, after January 1, 2006, a husband and wife may give each of their three children $24,000 in cash or property, or $72,000 in total, without incurring a gift tax liability.

NOTE: There is an unlimited gift tax exclusion for applicable tuition payments and medical expenses.

Gift Tax Credit

The credit may be applied to gift transfers occurring during life. However, the maximum credit amount that may be used is $1.0 million.

For example, if a taxpayer makes a $712,000 cash gift to an individual and elects to use the credit to offset the gift tax after application of the annual exclusion of $12,000, the overall credit is reduced by $700,000 to $1.3 million and the credit amount for future gifts is lowered to $300,000.

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All contents copyright 1995-2005 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet is a registered trademark of Robert L. Sommers.