What Is the Unified Credit for Estate and Gift Tax?

How the Unified Credit Works

The unified credit is a fundamental component of the federal transfer tax system, designed to reduce or eliminate tax liabilities on certain transfers of wealth. It functions as a dollar-for-dollar reduction against the tax that would otherwise be due. This credit is applied directly against the calculated tax, rather than being a deduction that reduces the value of the assets subject to tax. Its primary purpose is to allow individuals to transfer a significant amount of wealth during their lifetime or at death without incurring federal gift or estate taxes.

Each individual receives a single, lifetime unified credit to offset cumulative taxable transfers. This credit is not an annual allowance but a cumulative amount applied to lifetime gifts and assets transferred at death. It allows a certain value of assets, known as the “exemption equivalent,” to pass free of federal transfer taxes.

The credit’s use is tracked cumulatively throughout an individual’s life and at death. Any portion used for lifetime taxable gifts reduces the amount available at death. If no taxable gifts are made, the full credit remains for estate tax. Transfers exceeding the available exemption equivalent become subject to federal transfer taxes.

Unified Credit and Estate Tax

At an individual’s death, the unified credit reduces or eliminates federal estate tax on the taxable estate. The exemption equivalent represents the maximum estate value that can pass to beneficiaries without federal estate tax. Estates valued below this amount typically owe no federal estate tax.

Applying the unified credit to estate tax starts with calculating the gross estate, which includes all assets owned at death. Deductions like funeral expenses, administrative costs, debts, and transfers to a surviving spouse or charities are subtracted. The remaining figure is the taxable estate, subject to progressive federal estate tax rates.

After calculating the tentative estate tax based on the taxable estate and applicable rates, the unified credit is applied. This credit directly reduces the calculated tax liability dollar-for-dollar. For example, if the tentative estate tax is $1 million and the unified credit provides an offset of $1 million, no federal estate tax would be due. If the tentative tax exceeds the credit, only the excess amount is payable.

Unified Credit and Gift Tax

The unified credit also applies to federal gift tax on transfers made during an individual’s lifetime. When taxable gifts are made, a portion of the lifetime unified credit offsets any gift tax liability. The exemption equivalent functions as a lifetime total, encompassing both taxable gifts and the taxable estate.

The annual gift tax exclusion differs from taxable gifts. The annual exclusion allows individuals to give a certain amount to any number of recipients each year without using unified credit. For 2025, this is $19,000 per recipient. Gifts exceeding this amount to a single recipient are taxable and consume the unified credit.

Taxable gifts, the value exceeding the annual exclusion, are reported to the IRS on Form 709, the Gift Tax Return. Gift tax is calculated on this amount, and the unified credit is applied. The cumulative total of all taxable gifts made during life is added back to the taxable estate at death to calculate the unified credit available against estate tax.

Unified Credit and Generation-Skipping Transfer Tax

While the unified credit offsets federal estate and gift taxes, its relationship with the Generation-Skipping Transfer (GST) tax is separate. The GST tax is a federal transfer tax on property transfers to “skip persons,” typically individuals two or more generations younger than the transferor. This tax is levied in addition to any applicable estate or gift tax.

A separate GST tax exemption allows wealth transfers to skip persons without incurring the GST tax. For 2025, the GST tax exemption is $13.99 million, aligning with the unified credit. This simplifies planning, as the same amount can generally be transferred free of both estate/gift tax and GST tax.

Despite similar exemption amounts, the GST tax is a separate levy. It targets wealth transfers that “skip” a generation, preventing avoidance of multiple transfer tax levels. The unified credit focuses on direct wealth transfer, while the GST exemption addresses transfers bypassing intervening generations.

Current Unified Credit Amounts and Portability

The federal unified credit exemption amount, the exemption equivalent, is adjusted annually for inflation. For 2025, it is $13.99 million per individual for federal estate and gift tax purposes. This allows an individual to transfer up to $13.99 million in assets during their lifetime or at death without incurring federal transfer tax, assuming no prior use of the credit.

Portability is a key feature for married couples. It allows a surviving spouse to utilize any unused portion of their deceased spouse’s unified credit exemption. This means the surviving spouse can add the deceased spouse’s unused exemption to their own, increasing their total transfer amount free of federal estate and gift taxes. For example, a married couple may transfer up to a combined $27.98 million without incurring gift or estate tax.

To elect portability, the executor of the deceased spouse’s estate must file IRS Form 706, a federal estate tax return, even if no estate tax is due. This return is generally due within nine months of death, with a possible six-month extension. The IRS also offers a simplified method, allowing Form 706 to be filed on or before the fifth anniversary of death if no estate tax was initially required. Filing Form 706 is necessary for the surviving spouse to claim the unused exemption.