It makes sense for provide year-end gifts to your children and family members, because gift giving can save federal and state death taxes

Year-end is ideal time to make gifts. As year end approaches, it is an ideal time for making gifts. The first $11,000 of gifts ($22,000 for married couples who split gifts) you make to each child in calendar year 2005 is excluded from the amount of your taxable gifts. (Code Sec. 2503(b)) (It is expected that this exclusion will increase to $12,000 for gifts made in 2006.)

Gifts can save estate tax. Making use of the annual exclusion can save estate tax because the cash or other assets comprising the gifts, and the post-transfer growth in their value, are removed from your estate at no transfer tax cost.

For 2005, $1.5 million is exempt from Federal estate tax. This applicable exclusion increases to $2 million for 2006, 2007 and 2008. (Code Sec. 2010(c)) With the value of your home, retirement benefits, savings, investments, and the proceeds of a life insurance policy, you may discover that you are within reach of the estate tax.

No carryover. You cannot carry over any unused gift tax annual exclusions to the next year. Thus, if you plan to take advantage of the annual exclusion to make a gift to your children this year, you must make sure that the gift is completed this year.

Completing the gift could be a problem where a gift is made by check. If a gift is made by check near the end of 2005 and you want to take advantage of the exclusion this year, you should urge your child to deposit the check before year-end, so that there is no doubt as to when the gift was made.

Tuition and medical gifts. Making a direct payment for your child’s tuition or medical expenses is not a taxable gift. (Code Sec. 2503(e))

Contributions to tax-favored qualified tuition programs and Coverdell education savings accounts are treated as present gifts that can qualify for the gift tax annual exclusion, with the option of spreading contributions in a single year over a five-year period. (Code Sec. 529(c)(2), and Code Sec. 530(c)(3))

Income tax savings. Sometimes, gifts can save family income taxes. This can occur in a number of ways. Take a gift of stock to a grandchild, for example. For Federal tax purposes, long-term gain on a sale of the stock by the grandchild may be taxed at 5% whereas it could be taxed at 15% if the grandparent retained the stock and sold it. The spread could be 10% and 35% for gain taxable as ordinary income. For gift property that yields income, savings can be realized if the donee is in a lower marginal bracket than the donor. Maximum savings will be realized, however, for a gift to a child of the donor only if the child is at least 14 by the end of the year in which the income is received. For a child who is still under 14 at that time, some of the income may be taxed at the parent's highest marginal rate as a result of the "kiddie tax" but some savings are still possible. (Code Sec. 1(g))