Unified Tax Credit

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Unified Tax Credit: What It Is and How It Works

What is the unified tax credit?

The unified tax credit (also called the unified transfer tax) is an IRS provision that combines the lifetime exemptions for gift and estate taxes into a single system. It determines how much an individual can give during life (gifts) and transfer at death (estate) before federal gift or estate taxes apply.

Key takeaways

  • The unified credit lets individuals transfer a large lifetime amount free of federal gift or estate tax; amounts over the exemption can be taxed.
  • For 2025 the lifetime exemption is $13.99 million per individual ($27.98 million for married couples filing jointly). For 2024 it was $13.61 million per individual ($27.22 million for married couples).
  • The annual gift tax exclusion (per recipient) is $19,000 in 2025 ($18,000 in 2024). Married couples can “split” gifts, effectively doubling the per-recipient exclusion.
  • Gifts above the annual exclusion must be reported on Form 709; they reduce your remaining lifetime exemption but generally don’t trigger tax until the lifetime exemption is exceeded.
  • The top federal estate tax rate is 40% on taxable amounts above the exemption.

How the unified credit works

  • Lifetime gifts and testamentary transfers (assets left at death) share a common exemption. Amounts that exceed the annual per-recipient exclusion are reported and counted against the lifetime exemption.
  • The donor is generally responsible for paying any gift tax. In some cases, the recipient may agree to pay it.
  • At death, the estate can use the remaining unified credit to offset estate tax. The executor files Form 706 to report the estate and determine any tax due.

Annual gift tax exclusion

  • Annual exclusion amounts are per recipient. For 2025 the exclusion is $19,000 per recipient ($38,000 for a married couple gifting together). For 2024 it was $18,000 per recipient ($36,000 for a married couple).
  • If you give more than the annual exclusion to a single person in a year, you must file IRS Form 709 to report the gift. The excess reduces your lifetime exemption.
  • Certain transfers do not count as taxable gifts and do not require Form 709:
  • Gifts at or below the annual exclusion
  • Gifts to a U.S. citizen spouse (generally unlimited)
  • Payments made directly to medical providers for someone else’s medical expenses
  • Payments made directly to an educational institution for someone else’s tuition
  • Gifts to qualifying charities and certain tax-exempt organizations
  • Transfers to political organizations

Note: The annual exclusion for gifts to a non‑U.S. citizen spouse is higher than the standard annual exclusion and is adjusted periodically; check the IRS for the current figure.

Filing and reporting

  • Form 709 (United States Gift (and Generation‑Skipping Transfer) Tax Return) is used to report gifts above the annual exclusion and to elect gift‑splitting for spouses.
  • Form 706 (United States Estate (and Generation‑Skipping Transfer) Tax Return) is used by an estate’s executor to report the estate and claim the unified credit at death when required.

Federal estate tax rates

  • Estates are subject to federal estate tax only on the value that exceeds the lifetime exemption. Only a small percentage of U.S. estates exceed these thresholds.
  • The top federal estate tax rate reaches 40% for taxable amounts above the applicable tax brackets.

State estate and inheritance taxes

  • In addition to federal estate tax, some states impose their own estate or inheritance taxes. As of recent years, about a dozen states plus the District of Columbia impose state-level estate taxes. Rates and thresholds vary; in some states top rates can approach or reach about 20%.

Probate and planning considerations

  • The unified credit affects estate‑tax liability, not probate costs. However, estate planning strategies that use lifetime gifts, trusts, or other transfers can help reduce the size of a taxable estate and potentially limit federal and state estate taxes and probate exposure.
  • Because gift and estate tax rules interact and change over time, and because individual circumstances vary, consult a qualified tax or estate planning professional before making large gifts or implementing complex transfer strategies.

Bottom line

The unified tax credit provides a substantial combined lifetime exemption for gift and estate taxes, allowing most taxpayers to transfer significant assets free of federal transfer tax. Annual exclusions let you make smaller gifts tax‑free without reporting. For gifts or estates that approach exemption limits, timely reporting and professional guidance are essential.