Unified Tax Credit Definition and Limits

Unified Tax Credit: Definition and Limits

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 lifetime tax exemptions for gift and estate taxes. The combined exemption limit applies to taxable gifts you make during your lifetime and assets you leave to beneficiaries.

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 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 2023 is $12.92 million for individuals and $25.84 million for married couples filing jointly. For 2024, it is $13.61 million and $27.22 million, respectively.

-For the tax year 2023, you can give up to $17,000 or $34,000 for spouses "splitting" gifts tax-free to recipients without using any of your lifetime gift and estate tax exemption. For 2024, the numbers are $18,000 and $36,000, 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 $17,000 in 2023 and $18,000 in 2024 without notifying the IRS. The annual exclusion is per person, so married couples filing jointly can gift up to $34,000 in 2023 or $36,000 in 2024 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 2023 federal tax law applies the estate tax above $12.92 million. Individuals can pass $12.92 million to their heirs, and couples can transfer twice that without paying tax. For 2024, the exemption is $13.61 million for individuals and $27.22 million for married couples filing jointly.

Only a percentage of estates in the U.S. are 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

< $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

Source: Internal Revenue Service

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 2023 and 2024?

For 2023, the exclusion is $17,000, and $18,000 in 2024. The annual amount you can gift to a spouse who is not a U.S. citizen is $175,000 in 2023 and $185,000 in 2024.

What Is the Gift and Estate Tax Exemption for 2023 and 2024?

For 2023, the exemption is $12.92 million or $25.84 million if you’re married and filing jointly. For 2024, the exemptions are $13.61 million and $27.22 million, respectively.

Which States Have an Estate Tax?

In addition to the federal estate tax, 12 states and the District of Columbia impose state estate taxes. Hawaii and Washington have the highest top estate tax rates at 20%. 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 lifetime tax exemptions for gift and estate taxes. The combined exemption limit applies to taxable gifts you make during your lifetime and assets you leave to beneficiaries. Most taxpayers can gift up to $17,000 in 2023 and $18,000 in 2024 without notifying the IRS, but thresholds may change annually. Taxpayers can use the unified tax credit before or after death or both.