How Do Unified Credit Gift Tax Exclusions Work? By Austin Estate Planning Attorney Zachary D Kamykowski

Most people know they pay taxes on earnings and when money grows. However, there are also taxes when cash or other assets are given away or passed to another after death. The unified tax credit is central to estate planning, says a recent article titled “What Are The Unified Credit’s Gift Tax Exclusions?” from yahoo!.

First, what is the Unified Tax Credit?

Sometimes called the “unified transfer tax,” the unified tax credit combines two separate lifetime tax exemptions. The first is the gift tax exclusion, which concerns assets given to others during your lifetime. The other is the estate tax exemption, which is the value of an estate not subject to taxes when inherited. Your estate or heirs will only pay taxes on the portion of assets exceeding this threshold.

The unified tax credit is an exemption applied both to taxable gifts given during your lifetime and the estate you plan to leave to others.

You can also use the unified tax credit to do a little of both. If you would rather gift with warm hands while living, you can pull from this unified credit and avoid paying additional taxes on monetary gifts in the year you gave them. However, if you’d rather keep your assets and distribute them after death, you can save the unified credit for after death.

The unified tax credit changes regularly, depending on the estate and gift tax regulations. The gift and estate tax exemptions doubled in 2017, so the unified credit currently sits at $12.06 million per person in 2022. This will expire at the end of 2025 when credits drop to lower levels unless new legislation passes.

Up to 2025, a married couple can give away as much as $24.12 million without paying additional taxes. The recipient of this generous gift would not have to pay other taxes either. If you consider the rate of estate taxes—40%—optimizing this unified tax credit means more money stays in your loved one’s pockets.

How does it work?

Let’s say you have four children, and each will receive a taxable gift of $500,000. You can pull from your unified tax credit the same year you give these gifts. This way, there’s no need for you to pay gift taxes on the $2 million.

However, this generosity will reduce your lifetime unified credit from $12.06 million to $10.06 million. If you die and leave an estate worth $11.5 million, your heirs must pay estate taxes on the $1.44 million difference.

At current estate tax rates, roughly $700,000 would go to the IRS, or more, depending upon your state!

The unified tax credit doesn’t consider or apply to annual gift exclusions. These annual exclusions allow you to give away even more money during your lifetime, which doesn’t count against your unified limit. As of 2022, taxpayers may give $16,000 per year to any individual as a tax-exempt gift. The annual gift is per person, so if you are married, you and your spouse may give $32,000 per year to as many people as you want, and the gift is excluded. You can give $16,000 to as many people as you wish each year without being subject to gift taxes. This is a simple way to gift with warm hands without paying gift taxes or reducing the unified limit.

Taxable gifts exceeding the annual gift exclusion amount must be appropriately documented and should be done in concert with your overall estate plan. They offer significant tax advantages and, perhaps more importantly, provide the giver with the joy of seeing their wealth translate into a better life for their loved ones.

Reference: yahoo! (Nov. 18, 2022) “What Are The Unified Credit’s Gift Tax Exclusions?”