Tax Credits

• A tax credit can reduce or eliminate the amount of federal income tax owed. The unified tax credit deals with the amount of money and property a person can give or transfer to other people without paying gift tax and estate tax on it. Giving money or property to someone while you are alive may require a federal gift tax to be paid. Similarly, when you die, your estate may be required to pay a federal estate tax, also referred to as an inheritance tax. There are different tax laws and rates for gift and estate taxes, but the unified tax credit takes these two amounts in consideration to consolidate or unify them over a person's lifetime to help reduce taxes.
  
  

The Gift Tax

• The annual gift tax exclusion for 2009 was $13,000, up from $12,000 in 2008. This means during that year you could give someone a gift of up to $13,000, the annual exclusion rate, without having to pay a gift tax. The receiver pays no tax. If your gift to one person was $20,000, then the balance after the exclusion, $7,000, would be taxable. However, the unified tax credit for gift purposes in 2009 was $345,800. That means you could gift up to that amount during your lifetime without incurring a tax.
  
  

The Estate Tax

• When you die, your estate, that is, your money and property, can be passed on to others, but may incur an estate tax. In 2009, estates valued at less than $3.5 million were not taxed. No estate tax was required in 2010 due to the tax being briefly repealed. However, it is reinstated in 2011 with a $1 million exclusion limit. By invoking the unified tax credit, the estate tax may be reduced even if the estate is valued higher than the current year's estate tax exclusion.
  
  

Unifying Gift And Estate Taxes Over Your Lifetime

• Any gift tax you owe for a particular calendar year can be essentially eliminated by implementing the unified tax credit. Whatever amount you owe is simply reduced from a running total for your lifetime subtracted for the allowable unified tax credit, which every taxpayer is given. In the above example, the $7,000 taxable gift amount is simply subtracted from the total credit the Internal Revenue Service (IRS) gives you via the unified tax credit, and this reduces the total credit you can use in later years against gift taxes and at your death, against estate taxes. IRS Publication 950 explains, "Basically, any Unified Credit not used to eliminate gift tax can be used to eliminate or reduce estate tax."