Woman calculating her unified tax credit
Typically, you can expect to pay taxes when you earn your money, when you spend your money and even when your money grows. However, you and your loved ones may also be expected to pay taxes on your money when you give it away or pass it down upon your death. Gift taxes and estate taxes are only applied if your bequeathed assets exceed a certain dollar amount. Here’s a look at what the unified tax credit is, how it relates to gift or estate taxes and who this credit impacts. Consider working with a financial advisor as you coordinate your estate planning and tax strategy.
What Is the Unified Tax Credit?
Also known as the unified transfer tax, the unified tax credit actually combines two separate lifetime tax exemptions.
The first is the gift tax exclusion, which involves assets that you give to other individuals while still alive. The other is the estate tax exemption, which is the value of your estate that is not subject to taxes when it’s inherited. Instead, your estate or heirs will only pay taxes on the portion of assets that exceed this threshold.
The unified tax credit is an exemption limit that applies both to taxable gifts you gave during your life and the estate you plan to leave behind for others.
If you’d prefer to give away more of your assets while still alive, in the form of gifts to loved ones, you can pull from this unified credit and avoid paying additional taxes on those monetary gifts in the year you gave them. However, if you want to hold onto your assets and only disburse them when you die, you can save the unified credit for after your death. Or, of course, you can use the unified tax credit to do a little bit of both.
What Is the Unified Tax Credit Amount for 2021?
The unified tax credit changes regularly, depending on regulations related to estate and gift taxes. The gift and estate tax exemptions were doubled in 2017, so the unified credit currently sits at $11.7 million per person. However, this is set to expire in 2025, at which time the credits will drop back down unless new legislation is passed.
Up until 2025 (or longer if the unified credit is extended) a married couple could give away a total of $23.4 million without them or their loved ones paying additional taxes.
Considering that inherited assets from an estate are currently taxed at 40%, optimizing this unified tax credit can mean a lot more of your hard-earned money stays in your loved ones’ pockets.
How the Unified Tax Credit Works
“GIFT TAX” written on a piece of paper
As mentioned, the unified tax credit can be utilized for either inter-vivos gifts (money and assets you give away while you’re still alive) or bequests at death (money and assets you leave behind when you pass away). You can choose to use this lifetime credit now, later or both. For example, let’s say that you give each of your four children a taxable gift of $500,000, to help them start a business or buy a home. You can pull from your unified tax credit the same year you give those gifts. That way, you aren’t required to pay gift taxes on the $2 million.
However, this will reduce your lifetime unified credit from $11.7 million to $9.7 million. If you later pass away and leave your children an estate worth $11.5 million, they will be responsible for paying estate taxes on the $1.8 million difference that is inherited.
At current estate tax rates, about $720,000 would go to the IRS — perhaps more, depending on your state.
Let’s say you didn’t give those gifts during your lifetime, however, and saved your unified tax credit for your inheritors. In this case, your entire $11.5 million estate would be excluded from estate taxes (according to current legislation).
Annual Gift Tax Exclusions
The unified tax credit does not take into account or apply to annual gift tax exclusions, though. With these annual exclusions, you’re able to give away even more money during your lifetime, without it counting against your unified limit.
As of 2021, you are able to give $15,000 per year to any individual, as a tax-exempt gift. This means that you can give $15,000 every year to each of your 10 children, without being subject to gift taxes on that $150,000. Do this for 10 years, and you’ve given away $1.5 million without paying gift taxes or reducing your unified limit.
The annual gift tax exclusion is per person, as well, so you and your spouse could technically give away $30,000 per year to any one person and it be excluded. If you and your spouse wanted to give your son and daughter-in-law a gift of $60,000, for instance, the entire amount could be exempt from gift taxes, as long as it’s annotated properly.
So, say you gave your brother a $45,000 gift this year. Your annual gift exclusion means that you wouldn’t pay gift taxes on the first $15,000 of that. The remaining $30,000 could then be applied to your unified tax credit, reducing it to $11.67 million.
The Bottom Line
Woman calculating her taxes
Whether you choose to give monetary gifts during your lifetime or want to simply leave your estate behind when you die, the unified tax credit lets you and your loved ones avoid some additional taxes. This credit combines both gift taxes and estate taxes, allowing you to mix and match according to your own gift-giving style. It also does not apply to any gifts that fall under the annual gift tax exclusion.
Tips for Estate Planning and Gifts
If you want to avoid paying additional gift taxes now — or leaving hefty inheritance and/or estate taxes for your loved ones — it’s important to work with a trusted financial advisor who can help with your estate planning needs. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Our free online search tool can help you find a qualified, local financial advisor who can walk you through your asset- and estate-planning options.
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