How Are Estate & Gift Taxes Calculated?

Unified Credit

A credit is an amount that eliminates or reduces tax. A unified credit applies to both the gift tax and the estate tax. You must subtract the unified credit from any gift tax that you owe. Any unified credit you use against your gift tax in one year reduces the amount of credit that you can use against your gift tax in a later year. The total amount used against your gift tax reduces the credit available to use against your estate tax.

In 2001, the unified credit was $220,550, which eliminated taxes on a total of $675,000 (applicable exclusion amount) of taxable gifts and taxable estate. These amounts were increased for gifts made, and for estates of decedents dying, after 2001. The following table shows the unified credit and the applicable exclusion amount for the calendar year in which a gift is made or a decedent dies.

 

For Gift Tax Purposes:

 

For Estate Tax Purposes:

 Year

Unified
Credit

Applicable
Exclusion
Amount

Unified
Credit

Applicable
Exclusion
Amount

  2002 and 2003

$345,800

$1,000,000

$345,800

$1,000,000

  2004 and 2005

345,800

1,000,000

555,800

1,500,000

  2006, 2007and 2008

345,800

1,000,000

780,800

2,000,000

  2009

345,800

1,000,000

1,455,800

3,500,000

Applying the Unified Credit to Gift Tax

After you determine which of your gifts are taxable, you figure the amount of gift tax on the total taxable gifts and apply your unified credit for the year.

Example. In 2003, you give your niece, Mary, a cash gift of $8,000. It is your only gift to her this year. You pay the $15,000 college tuition of your friend, David. You give your 25-year-old daughter, Lisa, $25,000. You also give your 27-year-old son, Ken, $25,000. Before 2003, you had never given a taxable gift. You apply the exceptions to the gift tax and the unified credit as follows:

  1. Apply the educational exclusion. Payment of tuition expenses is not subject to the gift tax. Therefore, the gift to David is not a taxable gift.
  2. Apply the annual exclusion. The first $11,000 you give someone during 2003 is not a taxable gift. Therefore, your $8,000 gift to Mary, the first $11,000 of your gift to Lisa, and the first $11,000 of your gift to Ken are not taxable gifts.
  3. Apply the unified credit. The gift tax on $28,000 ($14,000 remaining from your gift to Lisa plus $14,000 remaining from your gift to Ken) is $5,560. You subtract the $5,560 from your unified credit of $345,800 for 2003. The unified credit that you can use against the gift tax in a later year is $340,240.

You do not have to pay any gift tax for 2003. However, you do have to file Form 709.

Applying the Unified Credit to Estate Tax

Basically, any unified credit not used to eliminate gift tax can be used to eliminate or reduce estate tax. However, to determine the unified credit used against the estate tax, you must complete the worksheets in the Instructions for Form 706.



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