Table of Contents

Unified Tax Credit: Definition and Limits

By

Michelle P. Scott

Updated March 10, 2023

Reviewed by

Ebony Howard

Fact checked by

Jared Ecker

What Is the Unified Tax Credit?

The unified tax credit, or unified transfer tax, is available to all U.S. taxpayers by the Internal Revenue Service (IRS) and combines two separate lifetime tax exemptions for gift and estate taxes. The combined exemption limit applies to taxable gifts you make to others during your lifetime, inter vivos gifts, and assets you leave to beneficiaries as testamentary transfers.

Key Takeaways

The unified tax credit defines a dollar amount that an individual can gift during their lifetime and pass on to heirs before gift or estate taxes apply.
The tax credit unifies the gift and estate taxes into one tax 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 or $32,000 for spouses "splitting" gifts tax-free to recipients 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 another while living may face gift taxes. Assets left for beneficiaries after death may be subject to estate taxes. 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 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 gifts 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

Most taxpayers can gift up to $16,000 in 2022 and $17,000 in 2023 without notifying the IRS.The annual exclusion is per person, so married couples filing jointly can gift up to $32,000 in 2022 or $34,000 in 2023 without filing a gift tax return. If you give more than $17,000 in 2023, you must disclose the gift on Form 709. Doing so doesn't necessarily mean you will owe taxes on the amount, but the value over $17,000 may 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 medical exclusion
Qualified payments for tuition exclusion
Transfers to political organizations
Transfers to certain exempt organizations

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."

Federal Estate Tax Rates

The 2022 federal tax law applies the estate tax above $12.06 million. Individuals can pass $12.06 million to their heirs, and couples can transfer twice that without paying tax. For 2023, the exemption is $12.92 million for individuals and $25.84 million for married couples filing jointly.

Only a 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. 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

The probate process can be expensive, so some people use the unified tax credit to save on estate taxes after their deaths. The credit is not used for reducing gift taxes during the individual's lifetime but instead 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. Keep up on the annual gift exclusion and gift and estate tax exemption since tax laws change periodically.

What Is the Gift Tax Exclusion for 2022 and 2023?

For 2022, the exclusion is $16,000, and $17,000 in 2023. The annual amount you can gift to a spouse who is not a U.S. citizen is $164,000 and $175,000 in 2023.

What Is the Gift and Estate Tax Exemption for 2022 and 2023?

For 2022, the exemption is $12.06 million or $24.12 million if you're married and 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 imposed on all states, twelve 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 tax rate, 12%.

The Bottom Line

The unified tax credit is available to all U.S. taxpayers by the IRS and combines two separate lifetime tax exemptions for gift and estate taxes. The combined exemption limit applies to taxable gifts you make to others during your lifetime and assets you leave to beneficiaries. Most taxpayers can gift up to $16,000 in 2022 and $17,000 in 2023 without notifying the IRS, but thresholds may change annually. Taxpayers can use the unified tax credit before or after death or both.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

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.

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