What is the Unified Tax Credit? How Does it Change Federal Gift and Estate Taxes?
UPDATED: December 12, 2019
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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.
Unified Tax Credit and its RepealFor 2009 tax returns, every American received an automatic unified tax credit against 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In 2010, the federal estate tax part of the unified tax credit was repealed. That meant you could not 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 35%. Fortunately, while the federal estate tax was repealed in 2010, the gift tax remained in effect. The maximum gift tax rate was also 35% for 2011 and increased to 40% in 2013.
Estate Tax Reinstatement
Though the estate tax was suspended for 2010, it was reinstated for 2011 but not to its original 2002 levels. For 2011, a person could transfer up to $5 million tax-free at death or during his or her lifetime (this special exemption is known as the basic exclusion amount); the unified credit for 2011 was $1,730,800. That base federal exclusion amount is adjusted annually for cost of living increases, as shown below:
2015: $5.43 million
2016: $5.45 million
2017: $5.49 million
2018: $11.18 million
2019: $11.4 million
The increase in the base amount in 2018 was due to the passage of the 2017 Tax Acts and Jobs Act. However, under the 2017 Tax Act, the base exemption amount amount reverts in 2026 to the 2017 levels, which are adjusted for inflation). The basic exclusion is equivalent to a unified tax credit of $2,117,800 in 2015, $2,125,800 in 2016, $2,141,800 for 2017, and $4,417,800 for 2018.
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.