Marital deduction

A tax reduction that is mainly used for the purposes of estate and gifts. It allows an individual to transfer some assets to his or her spouse tax free, creating a deduction in taxable income.

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The IRS has strict guidelines for allowable deductions, so it is important to make sure you or your accountant adheres to them when making deductions.

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Provision in the federal estate and gift tax law allowing spouses to transfer unlimited amounts of property to each other free of tax. Such transfers may be made during the life or at the death of the transferor, and are intended to treat a couple as an economic unit for transfer tax purposes. Although the deduction is unlimited, passing all assets to a spouse may create transfer tax problems in the surviving spouse's estate; planners should try to fully use each spouse's Unified Credit, which offsets up to $2 million in transfers in 2006, and equalize the rate of transfer taxes for both spouses to reduce taxes for the couple. According to the Economic Growth and Tax Relief Reconciliation Act of 2001, the amount of assets that each person can exclude from federal taxes rises from $2 million in 2006 through 2008 to $3.5 million in 2009. In 2010, the estate tax is completely repealed, and in 2011 the estate tax law returns using 2001 rules, except that the exemption goes to $1 million.

The tax-free amount one transfers by Will to one's spouse. Current tax law allows an unlimited amount to be transferred without federal estate tax.
Example: The concept of a marital deduction is to treat husband and wife as one economic unit. Since 1981, a federal Estate Tax has been due only on taxable property that passes to another generation.

An estate or gift tax deduction permitting an individual or the individual's estate to deduct the value of certain property which has passed to his or her spouse for purposes of determining the amount of the taxable gift or estate. Outright transfers, life estates, and certain interests in property that will terminate will qualify for the marital deduction. I.R.C. §§2056, 2523. See also deduction [marital deduction].

Marital deduction is a type of tax law that allows a person to give assets to his or her spouse with reduced or no tax imposed upon the transfer. Some marital deduction laws even apply to transfers made postmortem. Spouses can transfer property between them tax free and ex-spouses can do that according to divorce decree. For U.S. estate and gift tax purposes, there is no tax on transfers between spouses, whether during lifetime or at death. There is no limit on the amount that may be transferred. However, there are two important exceptions. The federal gift tax marital deduction is only available if the donee spouse (the person receiving the gift) is a U.S. citizen. The federal estate tax marital deduction is available for bequests at death to a surviving spouse, whether or not he or she is a U.S. citizen. However, if the survivor is not a U.S. citizen, the bequest must take the form of a specialized type of trust known as a Qualified Domestic Trust.

References

• "Marital Deduction." Investopedia. Investopedia Inc., 2000. Answers.com 1 February 2006. http://www.answers.com/topic/marital-deduction

• "Case affects internet and international tax planning." "Richard S. Lehman, Esq." 17 August 2001. South Florida Business Journal. 1 February 2006. http://www.lehmantaxlaw.com/article_08_17_01.html

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