A: Dear Janet,

If a person gives someone money or property the giver may be subject to the federal gift tax. Generally, the person who receives a gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.

Gift tax usually does not apply (and a gift tax return does not need to be filed), until the value of the gifts that a person gives another during the year exceeds the annual exclusion. As you stated, the exclusion is $13,000 for 2011. However, that rule only applies to gifts given while the giver is alive, so your mother could only give you up to $13,000 this year free of gift tax under the annual exclusion.

Please be aware that tuition or medical expenses paid directly to a medical or educational institution for someone are not subject to gift tax. Also, gifts to a spouse are not taxable.

Federal gift and estate taxes can be complex, and there are many things to consider besides federal tax issues, when estate planning or dealing with an inheritance. Some actions that could be taken have deadlines (such as within nine months of death). I would urge your mother seek the advice of an estate tax attorney very soon.

A: Hello Rosie,

The reason why the tax form asks if you are age 65 or older is because you may be entitled to add an additional amount to your basic standard deduction based on your filing status. About two-thirds of all filers claim the standard deduction rather than itemizing deductions.

The basic standard deduction amount varies based on filing status. For example, the standard deduction for a single person on the 2010 federal tax returns filed this year is $5,700. Single taxpayers who are age 65 or over add an additional $1,400 for a total standard deduction amount of $7,100 (Married taxpayers age 65 or over add $1,100). The same additional amount may also be added to the standard deduction if a taxpayer is blind.

Your memory is good because the rules were different, as you suggest, prior to 1987. Under the pre-'87 rules, a person was entitled to an extra exemption for being age 65 or older and also for blindness, instead of an increased standard deduction as it is today.

Thanks for your inquiry.

A: Dear Mr. Wang,

The federal lifetime gift tax exclusion is $5 million in 2011. It was $1 million in 2010.

It is possible that a gift of partial interest in real property could be either a present interest gift or future interest gift, depending on the provisions of the gift.

In general, a gift of a future interest is a gift that the recipient cannot actually possess, enjoy, or receive income from until some time in the future. This blog is not the appropriate forum to make determinations about whether a gift is a gift of future interest.

Since all the facts and circumstances regarding the gift would need to be evaluated, I suggest you discuss this issue with a tax professional. An Enrolled Agent, CPA or attorney who specializes in estate and gift taxes would be a good choice.

Good luck.

A: Hi Laurie,

You are right to want to make sure you don't get penalized for having too little federal income tax paid throughout the year. Plus, paying taxes during the year avoids the possibility of facing a large tax bill that may be too difficult to pay all at once when you file.

When taxpayers receive income that is not subject to withholding, such as self-employment (which I assume is your situation) or capital gains from the sale of property, they may need to make estimated tax payments to avoid a penalty at tax time for underpayment of estimated tax.

Generally, to avoid a penalty in 2011 you must pay estimated taxes if you expect to owe at least $1,000 in tax after subtracting your federal income tax withholding and credits, and you expect your withholding and credits to be less than the smaller of either 90 percent of your 2011 taxes, or 100 percent of the tax on your 2010 return. There are special rules for farmers, fishermen, certain household employers and certain higher income taxpayers.

IRS Publication 505, Tax Withholding and Estimated Tax, explains the rules and how to avoid the penalty. Form 1040-ES, Estimated Tax for Individuals has a worksheet to estimate your 2011 tax, and it comes with vouchers you can use to make required estimated tax payments.

Sometimes it may be hard to come up with the quarterly payments in a lump sum. Another option allows you to make smaller payments more frequently. Under this method, you can give your employer a new Form W-4, Employee's Withholding Allowance Certificate to increase the federal tax withheld from your salary each paycheck. The IRS.gov website has an excellent tool called the Withholding Calculator to help taxpayers fill out a new W-4.

California state laws are not the same as federal income tax law, but there are some similar rules. Visit the Franchise Tax Board website for more information about California's rules at www.ftb.ca.gov, or call 800-852-5711 for assistance.

IRS Publication 505 and Forms 1040-ES and W-4 can be downloaded at www.irs.gov or you may have them sent to you by mail by calling 800-TAX-FORM (829-3676).

A: I am sorry to hear about your situation Deb.

One step you should definitely take is to contact the Internal Revenue Service as soon as possible to explain your situation. The IRS can work with taxpayers who are suffering an economic hardship, and communication is the key to minimizing problems. You can call the phone number on the bill or notice you received, or you can call 800-829-1040.

The IRS will discuss hardship relief you may be entitled to, such as postponing collection enforcement. You can also discuss your payment options, such as a short-term extension, an installment agreement or an offer in compromise. An offer-in-compromise is an agreement between a taxpayer and the IRS that settles tax liabilities for less than the full amount owed. An offer will normally not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement, unless there are special circumstances.

In February the IRS announced Fresh Start, which includes new policies and programs to help taxpayers pay back taxes and avoid tax liens. For more on the Fresh Start program visit the IRS website at http://www.irs.gov/newsroom/article/0,,id=236540,00.html?portlet=7 . Two other good IRS website resources are the Tax Center to Assist Unemployed Taxpayers at http://www.irs.gov/individuals/article/0,,id=219269,00.html , and The "What Ifs" of an Economic Downturn at http://www.irs.gov/newsroom/article/0,,id=201853,00.html .

If you can't resolve your tax problem with the IRS you should contact the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that assists taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should. You can call TAS toll-free at 877-777-4778. If you prefer, you can also call or write your local taxpayer advocate at 916-974-5007; 4330 Watt Ave., Stop SA5043, Sacramento, CA 95821.

If you need legal representation to help with your tax problem but can't afford it you may qualify for help from a Low Income Taxpayer Clinic. LITCs represent low income taxpayers and those who speak English as a second language before the Internal Revenue Service for free or for a nominal charge. You can get more information about LITCs at http://www.irs.gov/advocate/article/0,,id=106991,00.html .

Low income taxpayers also may be able to receive assistance from a referral system operated by state bar associations, state or local societies of accountants, and other nonprofit tax professional organizations.

I hope your situation is resolved the best way possible.

A: Hello Greg,

Federal tax rules regarding trusts are affected by several factors such as the type of trust and specific provisions of the trust. Generally, income earned by a trust is taxable to the trust unless it is distributed to the beneficiary. If income is distributed it normally is taxable to the beneficiary.

The general rule is that income earned by a trust during the tax year is reported on Form 1041, U.S. Income Tax Return for Estates and Trusts. If income is distributed to a beneficiary during the year, it would be reported on Form 1041 Schedule K-1, Beneficiary's Share of Income, Deductions, Credits, etc.

Our state equivalent forms are Form 541, California Fiduciary Income Tax Return, and Form 541 Schedule K-1, Beneficiary's Share of Income, Deductions, Credits, etc.

Perhaps the best source to ask about protecting trust assets and earnings and minimizing taxes is from an estate planning professional such as an attorney. The Sacbee also provides a forum for these types of questions at http://www.sacbee.com/qna/forum/estate/index.html .

A: Hi Pat,

If your sister-in-law makes a gift of the life insurance proceeds to you, you would not pay federal income taxes on the gift. That is because a gift is ordinarily nontaxable to the recipient, regardless of how large the gift.

Your sister-in-law normally would be required to file IRS Form 709, United States Gift Tax Return if she were to give you (or any person) more than the annual exclusion of $13,000 in total gifts during the 2011 calendar year. If gift tax applies it may be eliminated by the unified credit which is applied against taxable gifts of up to $5 million in 2011. This would also reduce the remaining unified credit to be applied against future taxable gifts or federal estate tax once the taxpayer passes away.

If that is what your sister-in-law intends to do, it may be worth her while to consult with an estate and gift tax professional about estate planning issues before making the gift.

A: Dear Mr. Wang,

Yes, the annual gift tax exclusion applies to gifts given to any person, not just children or other relatives.

If a taxpayer gives another person a gift or gifts that total more than $13,000 in 2011, he or she would be required to file a Form 709, United States Gift Tax Return. Even if gift tax applies, it may be eliminated by the unified credit which applies to both the gift tax and the estate tax. The applicable amount of the unified credit against taxable gifts in 2011 exempts $5 million from tax.

Any unified credit used against gift tax in a given year reduces the amount of credit that can be used against gift tax in a later year. The total amount used during a lifetime against gift tax reduces the credit available to use against estate tax.

It would be inappropriate for the IRS to speculate about future tax law changes.

Assuming your estate is as large as your questions suggest, I strongly urge you to seek the advice of a gift and estate tax professional such as an attorney.

A: Dear Mr. Wang,

It sounds like you want to know how to give a partial interest in real property and also avoid having to file a federal gift tax return. You are correct that the annual exclusion for gifts is currently $13,000 per person per year. However, gifts are not reported on a federal income tax return by the giver or the recipient. The giver is generally required to file a Form 709, United States Gift Tax Return if the total annual gifts to one person exceed the annual exclusion.

While those are federal tax issues, some of the questions you raise are not. Legal transfers of real property involve state and local laws as well as estate planning issues that are not appropriate for this forum.

There is no federal inheritance tax. The lifetime gift tax exclusion was $1 million in 2010. The federal gift and estate tax exclusion is $5 million in 2011. That amount applies to the value of lifetime gifts or the value of an estate regardless of the number of beneficiaries.

The legal procedures to transfer a partial interest in real property are based on state and local laws. Advice such as how to transfer title, about recording property deeds and whether you must or should establish a trust are important and sometimes complex, but they are not federal tax issues.

You probably should seek the counsel of a professional for your answers, such as an estate planner, tax attorney, CPA or Enrolled Agent who specialize in these issues.

Good luck to you.

A: Hello Michael,

If you are the personal representative for the estate you may need to file a final income tax return for the decedent. For example, if the three months of retirement income received before his death was the decedent's only income, and more than the filing requirement you would file Form 1040 or Form 1040A, U. S. Individual Income Tax Return.

Generally, single people who received gross income of at least $9,350 in 2010 are required to file. If a person is age 65 or older the requirement is increased to $10,750.You would file that tax return using his social security number. If federal income tax was withheld from the pension payments you should file a return to claim a refund, even if a tax return is not required.

The fact that the house was the only home the decedent owned would have no bearing on the taxability of the sale. You would need to file a tax return for his estate or trust if title to the house was not transferred from the decedent or a trust before it sold. Assuming the house was not income producing, such as a rental, the sale would normally be reported on Schedule D, Capital Gains and Losses of Form 1041, U.S. Income Tax Return for Estates and Trusts. The federal identification number for the estate or trust would be used on the 1041 form.

Please visit www.irs.gov and download Publication 559, Survivors, Executors, and Administrators. I also strongly urge you to get the help of a tax professional because the rules for estates and trusts can be complex.