Most gifts above the annual exemption are still not subject to tax because each taxpayer is allowed a lifetime credit against taxable gifts and estate. This credit reduces or eliminates the amount of taxes owed. A unified credit applies to both the gift tax and the estate tax. The unified credit is subtracted from any gift tax owed by the taxpayer. Unified credit used against a gift tax in one year reduces the amount of credit that can be applied against a gift tax in later years. The total amount used against a gift tax reduces the credit available to use against estate tax. In other words, any unified credit not used against gift tax during the taxpayer’s lifetime is available to reduce or eliminate an estate tax.
Previously, the law provided the same unified credit amount for both the estate tax and the gift tax. Under current law, however, the unified credit against taxable gifts is $345,800. This credit has the effect of exempting $1 million from tax. This amount will remain the same through 2009. The unified credit amount for estate tax purposes, on the other hand, changes from year to year.
The unified credit for estate tax purposes is $555,800, for a person who dies in either 2004 or 2005. This excludes $1,500,000 from estate tax. In 2006, 2007, and 2008, the unified credit for estate tax purposes is $780,800. This figure translates to an exclusion amount of $2 million from tax. In 2009, the unified credit rises to $1,455,800; the exclusion amount is $3,500,000.