What Was the 2016 Unified Credit for Estate & Gift Tax?

The federal government provides a tax mechanism that allows individuals to transfer a certain amount of wealth without incurring federal gift or estate tax. This is accomplished through a unified credit, a dollar-for-dollar amount applied against any calculated tax liability. This system links lifetime gifts and transfers at death, creating a single framework for wealth transfer taxation.

The Unified Credit and Exemption Amount

The federal tax code provides a buffer against estate and gift taxes through an exemption amount and its corresponding credit. For 2025, the basic exclusion amount—the value of assets an individual can transfer tax-free—is $13.99 million. Under current law, this exemption is scheduled to decrease significantly in 2026 to an inflation-adjusted level of approximately $7 million.

This exemption translates into a unified credit. Instead of simply not taxing the first $13.99 million of a transfer, the tax is first calculated on the entire amount. The credit, which is the amount of tax that would be due on a transfer equal to the full exemption, is then subtracted from the tentative tax owed.

The tax rate for transfers exceeding the exemption amount is a flat 40%. Any portion of a taxable estate or cumulative lifetime gifts above the $13.99 million threshold is subject to this rate. Because the credit is unified, any amount used to offset gift taxes during a person’s lifetime reduces the credit available for their estate.

Using the Credit for Lifetime Gifts

The application of the unified credit to lifetime gifts begins with the annual gift tax exclusion. For 2025, an individual can give up to $19,000 to any number of recipients without gift tax consequences. These gifts do not require filing a tax return and do not reduce the donor’s lifetime exemption. A married couple can combine their annual exclusions to give up to $38,000 to a single individual.

When a gift to a single person exceeds the $19,000 annual exclusion, it becomes a “taxable gift” that must be reported to the IRS on Form 709. For example, if a person gave a child $119,000 in 2025, the first $19,000 is covered by the annual exclusion, and the remaining $100,000 is the taxable portion.

This taxable gift amount is then subtracted from the donor’s remaining lifetime exemption. In the example of a $100,000 taxable gift, the donor’s available exemption would be reduced from $13.99 million to $13.89 million. No tax is due at that time; instead, a portion of the unified credit is effectively used, and Form 709 tracks this cumulative reduction.

Applying the Credit to an Estate

For a deceased individual’s estate, the unified credit is applied during a tax calculation on Form 706, the U.S. Estate Tax Return. The process begins by determining the decedent’s gross estate, which includes all property owned at death. From this, deductions for funeral expenses, administrative costs, and debts are subtracted to arrive at the taxable estate.

The estate tax calculation incorporates prior taxable gifts. The total amount of taxable gifts made by the decedent during their lifetime is added to the taxable estate. This creates a comprehensive tax base, and a tentative tax is then computed on this combined amount.

The unified credit is applied against this tentative tax. The credit is reduced by any amount previously used to offset taxes on lifetime gifts. If the remaining credit is sufficient to cover the tentative tax, no estate tax is due, but if the tax exceeds the credit, the estate is liable for the difference.

Portability of the Unused Exemption

A provision for married couples called “portability” allows a surviving spouse to use their deceased spouse’s unused gift and estate tax exclusion. This unused portion is known as the Deceased Spousal Unused Exclusion (DSUE) amount. If a married individual dies without using their full exemption, the remainder can be transferred to the surviving spouse.

For instance, if a spouse dies with a taxable estate of $3.99 million, they would have used that amount of their exemption, leaving $10 million unused. The surviving spouse could elect to take this $10 million DSUE amount and add it to their own exemption. This gives the survivor a total exemption combining their own and the amount from their deceased spouse.

This transfer of the DSUE is not automatic. The executor of the deceased spouse’s estate must file a Form 706 to report the value of the unused exclusion and formally elect portability. This filing is necessary even if the estate’s value is below the threshold that would otherwise require a return.