What Is a Unified Tax Credit?

A unified tax credit is a certain amount of assets that each person is allowed to gift to other parties without having to pay gift, estate, or generation-skipping transfer taxes. The credit is afforded to every man, woman, and child in America by the Internal Revenue Service (IRS).

Key Takeaways

  • The unified tax credit gives a set dollar amount that an individual can gift during their lifetime before any estate or gift taxes apply.
  • The tax credit unifies both the gift and estate taxes into one tax system which decreases the tax bill of the individual or estate, dollar to dollar.
  • Since some people prefer to use the unified tax credits to save on estate taxes after their deaths, the unified tax credit may not be used for reducing gift taxes while still alive, and may instead be used on the inheritance amount bequeathed to beneficiaries after death

Understanding the Unified Tax Credit

Individuals who give considerable assets to family and friends while still living are usually faced with gift taxes. Furthermore, any assets left for beneficiaries after an individual dies may be subject to estate taxes.

As of 2021, the federal estate tax is 40% of the inheritance amount. However, the unified tax credit has a set amount that an individual can gift during his or her lifetime before any estate or gift taxes apply. The 2021 federal tax law applies the estate tax to any amount above $11.7 million, which, when indexed for inflation, allows individuals to pass on $11.7 million and couples to transfer twice that amount without paying a penny of tax.

For example, assume an individual leaves $12.7 million (accounted for inflation) in nonexempt assets to his children. The amount above the federal level, that is, $12.7 million – $11.7 million = $1 million, will be subject to estate tax. In effect, the estate will be taxed 40% x $1 million = $400,000.

The unified tax credit integrates both the gift and estate taxes into one tax system. It is a tax credit that decreases the tax bill of the individual or estate, dollar to dollar. An individual or couple that plans to gift some of their assets to someone may need to file a gift tax return if the value of the assets is higher than the annual exemption amount. Gifts made to charities or to pay another person's medical or tuition expenses are exempt from gift tax return requirements.

Unified Credits and Probate

Since the probate process can be expensive, some people would rather use the unified tax credits to save on estate taxes after their deaths. This means that the credit will not be used for reducing gift taxes while still alive, but will instead be 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 figure the estate tax imposed by Chapter 11 of the Internal Revenue Code (IRC).

The unified tax credit can be used by taxpayers either before or after death. It is important to keep up to date on it as the tax credit changes frequently.