Sometimes inflation is a good thing

Thanks to recent uptick in inflation (to 5.4 percent over the previous 12 months), several tax breaks will be even bigger in 2009. According to The Kiplinger Tax Letter, the annual gift tax exemption will rise to $13,000 per recipient in 2009. That is a $1,000 increase over the $12,000 exemption currently in place.

Also in 2009, the personal exemption also rises significantly to $3,650. That is up from $3,500 in 2008.

Finally, the standard deduction amount will also increase. For married filers, the 2009 amount will be $11,400. That amount is $500 higher than it was in 2008. For single filers, the new amount is $5,700 and for head of household filers, the standard deduction will be $8,350. If you are age 65 or older and married, you will get an additional $1,100.

Making full use of the annual gift tax exclusion is a great way to reduce a taxable estate. Here's an example: in 2009, a husband and wife can give each of their three children and their children's spouses $26,000. That totals $156,000 in tax free gifts. If the same couple also had three grandchildren, they could give each grandchild $26,000 or $78,000 in total. Between the couple's children, their spouses and the grandchildren, this couple could reduce their taxable estate by $234,000 per year. It is important to note that you are not limited to family members when making gifts. In theory, you could give $13,000 to as many people as you wanted.