What Is a Unified Tax Credit?
The unified tax credit, also called the unified transfer tax, combines two separate lifetime tax exemptions for gift and estate taxes. The combined exemption limit applies to the taxable gifts you make to others during your lifetime (inter vivos gifts) and the money and assets you leave behind to beneficiaries (testamentary transfers). The credit is afforded to every U.S. taxpayer by the Internal Revenue Service (IRS).
- The unified tax credit gives a set dollar amount that an individual can gift during their lifetime and pass on to heirs before any gift or estate taxes apply.
- The tax credit unifies the gift and estate taxes into one tax system that decreases the tax bill of the individual or estate, dollar for dollar.
- The lifetime gift and estate tax exemption for 2022 is $12.06 million for individuals and $24.12 million for married couples filing jointly. For 2023, it is $12.92 million and $25.84 million, respectively.
- For the tax year 2022, you can give up to $16,000 ($32,000 for spouses "splitting" gifts) tax-free to as many recipients as you wish without using any of your lifetime gift and estate tax exemption. For 2023, the numbers are $17,000 and $34,000, respectively.
Understanding the Unified Tax Credit
Individuals who give substantial assets to anyone else while living may face gift taxes. Furthermore, any assets left for beneficiaries after an individual dies may be subject to estate taxes; however, the unified tax credit sets an amount that individuals can gift during their lifetime and bequeath to heirs before any gift and estate taxes apply.
The donor is generally responsible for paying the gift tax; however, the recipient may agree to pay the tax instead. If you are considering this type of arrangement, contact a tax professional for guidance.
The unified tax credit rolls the gift and estate tax exclusions into one tax system and decreases the individual's or estate's tax bill, dollar-for-dollar. An individual or couple who plans to gift some of their assets may need to file a gift tax return if the value of the assets is higher than the annual exclusion amount. Gifts made to charities or to pay another person's medical or tuition expenses are exempt from gift tax return requirements.
Annual Gift Tax Exclusion
In 2022, you can gift up to $16,000 per year (rising to $17,000 in 2023) to as many people as you wish without having to notify the IRS except in very specific cases.
According to the IRS, a gift is "any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return."
The annual exclusion is per person, so married couples filing jointly can gift up to $32,000 (or $34,000 for 2023) to any number of people without having to file a gift tax return. If you give more than $16,000 to anyone in a single year, you need to disclose the gift on Form 709. Doing so doesn't necessarily mean you will owe taxes on the amount. Instead, the amount over $16,000 may simply count against your lifetime exemption.
Several types of transfers aren't subject to gift tax requirements:
- Gifts that are less than the year's annual exclusion in most cases
- Gifts to a spouse
- Payments that qualify for the medical exclusion
- Payments that qualify for the tuition exclusion
- Transfers to political organizations
- Transfers to certain exempt organizations
Federal Estate Tax Rates
The 2022 federal tax law applies the estate tax to any amount above $12.06 million. So, individuals can pass $12.06 million to their heirs—and couples can transfer twice that amount—without paying a penny of tax. For 2023, the exemption increases to $12.92 for individuals and $25.84 for married couples filing jointly.
Only a small percentage of estates in the U.S. is worth more than these exemption thresholds. For those that are, federal estate tax rates apply to any amount above the exemption thresholds. For 2022, the federal estate tax maxes out at 40% for taxable amounts above $1 million. Here's a look at how the tax accumulates as the taxable amount increases:
|Unified Rate Schedule|
|Taxable Amount||Estate Tax Rate||What Your Estate Owes|
|$0 - $10,000||18%||$0 base tax + 18% of taxable amount|
|$10,001 - $20,000||20%||$1,800 base tax + 20% of taxable amount|
|$20,001 - $40,000||22%||$3,800 base tax + 22% of taxable amount|
|$40,001 - $60,000||24%||$8,200 base tax + 24% of taxable amount|
|$60,001 - $80,000||26%||$13,000 base tax + 26% of taxable amount|
|$80,001 - $100,000||28%||$18,200 base tax + 28% of taxable amount|
|$100,001 - $150,000||30%||$23,800 base tax + 30% of taxable amount|
|$150,001 - $250,000||32%||$38,800 base tax + 32% of taxable amount|
|$250,001 - $500,000||34%||$70,800 base tax + 34% of taxable amount|
|$500,001 - $750,000||37%||$155,800 base tax + 37% of taxable amount|
|$750,001 - $1,000,000||39%||$248,300 base tax + 39% of taxable amount|
|Above $1,000,000||40%||$345,800 base tax + 40% of taxable amount|
Unified Credits and Probate
Since the probate process can be expensive, some people use the unified tax credit to save on estate taxes after their deaths. This means the credit is not used for reducing gift taxes during the individual's lifetime but instead is used on the inheritance amount bequeathed to beneficiaries after death. To take advantage of this lifetime credit, beneficiaries or the decedent’s estate executor must complete IRS Form 706, which is used to determine the estate tax imposed by Chapter 11 of the Internal Revenue Code (IRC).
Taxpayers can use the unified tax credit before or after death—or both. It is important to keep up to date on the annual gift exclusion and gift and estate tax exemption as tax laws change periodically.
What Is the Gift Tax Exclusion for 2022?
Each year, the IRS sets the annual gift tax exclusion—the amount you can give tax-free to any number of recipients without using up any of your lifetime gift and estate tax exemption. For 2022, the exclusion is $16,000 ($17,000 in 2023). The annual amount you can gift to a spouse who is not a U.S. citizen is $164,000 ($175,000 in 2023).
What Is the Gift and Estate Tax Exemption for 2022?
The Tax Cuts and Jobs Act significantly increased the gift and estate tax exemption. For 2022, the exemption is $12.06 million or $24.12 if you're married filing jointly. For 2023, the exemptions are $12.92 million and $25.84 million, respectively.
Which States Have an Estate Tax?
In addition to the federal estate tax—which applies no matter where you live—12 states and the District of Columbia impose state estate taxes. At 20%, Hawaii and Washington have the highest top estate tax rates. Illinois, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and the District of Columbia have a top tax rate of 16%. Connecticut and Maine share the lowest top tax rate, 12%.
Internal Revenue Service. "What's New—Estate and Gift Tax."
Internal Revenue Service. "Frequently Asked Questions on Gift Taxes."
Internal Revenue Service. "Gift Tax."
Internal Revenue Service. "Estate Tax."
Internal Revenue Service. "Instructions for Form 709," Pages 2-3.
Internal Revenue Service. "Instructions for Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return," Pages 6-7.
Internal Revenue Service. "United States Gift (and Generation-Skipping Transfer) Tax Return."
Internal Revenue Service. "Instructions for Form 706."
Internal Revenue Service. "About Form 706, United States Estate (and Generations-Skipping Transfer) Tax Return."
Internal Revenue Service. "Frequently Asked Questions on Gift Taxes for Nonresidents Not Citizens of the United States."
Tax Foundation. "Facts & Figures: How Does Your State Compare?," Pages 52-53.
Tax Deductions and Credits Guide
What Is Tax Relief? How It Works, Types, and Example
Tax Benefit: Definition, Types, IRS Rules
Tax Break Definition, Different Types, How to Get One
Tax Deductions That Went Away After the Tax Cuts and Jobs Act
Tax Credits That Can Get You a Refund
Non-Refundable Tax Credit: Definition, How It Works, and Benefits
Earned Income Tax Credit (EITC): Definition and How to Qualify
Saver’s Tax Credit: A Retirement Savings Incentive
Unified Tax Credit: Definition and Limits for 2022
General Business Credit (GBC)
Foreign Tax Credit: Definition, How It Works, Who Can Claim It
Dependents: Definition, Types, and Tax Credits
How Much Does a Dependent Reduce Your Taxes?
Child and Dependent Care Credit Definition
Child Tax Credit Definition: How It Works and How to Claim It
Additional Child Tax Credit (ACTC): Definition and Who Qualifies
What Was the Hope Credit? How It Worked and Replacement
American Opportunity Tax Credit (AOTC): Definition and Benefits
Tax Deduction Definition: Standard or Itemized?
Itemized Deductions: What It Means and How to Claim
Tax-Deductible Interest: Definition and Types That Qualify
Charitable Contribution Deduction: Rules and Changes for 2022 and 2023
20 Medical Expenses You Didn’t Know You Could Deduct
Educator Expense Deduction
Top Tax Advantages of Buying a Home
Calculating the Home Mortgage Interest Deduction (HMID)
Tax Breaks for Second-Home Owners
Rental Property Tax Deductions
Getting U.S. Tax Deductions on Foreign Real Estate
401(k) vs. IRA: What’s the Difference?
IRA Contributions: Deductions and Tax Credits