A tax credit can reduce or eliminate your federal tax obligation. One such credit is the unified tax credit, so named because federal gift and estate taxes are integrated into one unified tax system. The extent of the benefit provided by the unified tax credit depends on the tax year in which you intend to use the credit. If you are still working on your income tax returns from prior to 2009, you may be able to take advantage of this credit to reduce the amount of federal taxes that you owe. After 2009, your ability to use the unified tax credit is limited by subsequent changes in the law.
For 2009 tax returns, every American received an automatic unified tax creditagainst federal estate and gift taxes of $1,455,800, which is equivalent to transferring $3.5 million tax-free to your heirs. If you were married, your spouse (also a U.S. citizen) received the same exemption credit, so that you could, as a couple, give a full $7 million to your heirs free of estate tax. There was no estate tax on the first $3.5 million in 2009, meaning you were not required to pay taxes until the sum reached over $3.5 million in 2009.
In 2010, the federal estate tax part of the unified tax credit was repealed. This means you cannot claim the unified tax credit for 2010 taxes. The estate tax rate has varied from 55% in 2001, dropping to 45% in 2009, and reappearing in 2011 at a top rate of 55%. Fortunately, while the federal estate tax was repealed in 2010, the gift tax remained in effect. The maximum gift tax rate is also 55% for 2011.
Though the estate tax was suspended for 2010, it has been reinstated for 2011 and provides for an estate tax exemption of $1 million per person with rates as high as 55%, unless Congress takes further action. Even though the credit is much smaller than prior years, the good news for married couples is that each spouse can claim the maximum credit for a total tax exemption of $2 million.
Because this unified tax credit has fluctuated fairly significantly since 2001, if you are unsure about how the unified tax credit is applicable to your tax situation for an income tax return due prior to 2010, you should consult with a tax attorney to ensure your potential credit is maximized. If you are considering making gifts this year, you may also want to visit with an attorney that specializes in estate planning to minimize the tax consequences for your estate and your heirs.