The money and property you own when you die (your estate) may be subject to federal estate tax if the estate is worth more than the applicable exclusion amount.
Most relatively simple estates (cash, publicly traded securities, small amounts of other, easily valued assets, and no special deductions or elections or jointly held property) with a total value under $2 million and a date of death in 2006 or 2007 do not require the filing of an estate tax return.
Additionally, the person who receives your estate generally won't have to pay an estate tax or an income tax on the value of the inheritance. If any tax is due – it will be paid by the estate.
Reduced Tax on Appreciated Securities
If you give your child appreciated securities (such as stock or mutual fund shares), the tax bill on the increase in value is passed on to the child along with the gift.
For example, stock you bought for $2,500 is now worth $5,000. If you sold the stock, you'd owe tax on the $2,500 gain. The 15% rate on long-term capital gains means it would cost you $375.
If you gave the shares to your child, the same $2,500 would be taxed, but at your child's rate. His or her income may be low enough to allow him or her to be taxed at the 5% long-term capital gains rate. If that's the case, the tax bill would be reduced to $125.
First Time Homebuyer Credit
Taxpayers who purchased a principal residence after April 8, 2008, through June 30, 2009, and who have not owned a principal residence in the previous 3 years may claim a refundable credit for 10% of the purchase price. The maximum credit is $7,500 ($3,750 MFS). Eligibility for the credit phases out for modified AGI between $75,000–$95,000 ($150,000–$170,000 MFJ).
Note: The credit must be repaid in 15 equal installments starting in 2010. Repayment is accelerated if the home is sold or no longer used as a principal residence.
Gift Tax
First off - the person who receives the gift doesn't have to report it to the IRS or pay gift or income tax on its value. If you get – you don’t have to give to the IRS. The person making the gift is the party responsible for paying the gift tax.
If you gave someone gifts valued more than $12,000, you must report the total gift to the IRS and may have to pay tax on the gifts. If you're Married Filing Jointly, the tax-free amount doubles to $24,000. If you or your spouse make a gift to a third party, the gift can be considered as made half by you and half by your spouse (known as gift splitting).
Again, the person who receives your gift doesn't have to report it to the IRS or pay gift or income tax on its value.
Taxable Gifts
Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift. There are some exceptions to the tax rules on gifts. The following gifts don't count against the annual limit:
Home Deductions
Buying a home is a great way to reduce your income tax. The qualified mortgage interest you pay and your real estate taxes are both deductible.
Itemizing Deductions
When you purchase a home, you're more likely to be able to itemize deductions on Schedule A. The following are more common itemized deductions not related to your home:
Some of these deductions are subject to limitations, so follow the instructions for Schedule A carefully.
Claiming the Mortgage Interest Deduction
Mortgage interest you pay on loans up to $1 million ($500,000 if you're Married Filing Separately) is deductible, provided you used the money to buy, build or improve your home and the loan is secured by your home.
Plus, the interest you pay on loans secured by your home and used for a purpose other than to buy, build or improve your home is deductible for loans up to $100,000 ($50,000 if you're Married Filing Separately). The limit may be reduced depending on the market value of the home at the time you take out the loan. Use equity lines of credit wisely. If you fail to make the payments, you put your home at risk.
If your income meets the requirements and your state or local government issued you a mortgage certificate credit, you may be eligible to claim a credit (the mortgage interest credit) based on the amount of interest you paid. If you claim the credit, you must reduce your interest deduction by the amount of the credit.
Deducting Loan Origination Fees
Finally, don't forget about points, also called loan origination fees. One point equals 1% of your loan. Points you pay (and even points the seller pays) when you purchase your home are generally deductible in full the year you pay them.
Alternatively, you may choose to amortize the points over the term of your mortgage. This choice is usually made only when your itemized deductions are less than the standard deduction for the year you bought the home.
Points paid to refinance a loan must be deducted over the term of the loan. If you deduct points over the term of the loan and sell the home or refinance it again before the loan expires, you can deduct in the year of the sale or refinancing any points that you didn't previously deduct.
Gaining on the Sale of Your Home
When you sell your home, the IRS allows you to exclude gain on the sale from taxable income, up to $250,000 ($500,000 if you're Married Filing Jointly and you both meet the use requirement).
You can claim the exclusion if you own and use the home as your main home for at least 2 years during the 5-year period ending on the date of sale. You may claim this exclusion only once in any 2-year period.
If you don't meet the 2-year requirement, you may be eligible to claim a reduced exclusion if you sell your home because of an "unforeseen circumstance," such as a change in employment or a divorce. A loss on the sale of your home, however, isn't deductible.