A unified tax credit allows you to gift assets without having to pay transfer taxes in some cases. All people are qualified to take advantage of this tax "perk" from the Internal Revenue Service (IRS). In short, the unified tax credit sets a dollar amount that each person is able to gift during their lifetime before any estate or gift taxes kick in. The "unified" aspect of this tax credit is that gift and estate taxes are rolled into one system to reduce your overall tax bill.
Read More: The Advantages of Gifting
What Is Unified Credit for 2021?
The IRS announced new estate and gift tax limits for 2021 during the fall of 2020. For 2021, the estate and gift tax exemption stands at $11.7 million per person. The previous limit for 2020 was $11.58 million.
This means that an individual is currently permitted to leave up to $11.7 million to heirs without any federal or estate gift taxes being applied. For married couples, that rises to a combined total of $23.4 million. The limit has been increased to keep up with inflation.
In addition to applying to gifts given during your lifetime, the Unified Tax Credit applies to gifts that you give after death as part of an inheritance. The inheritance tax rate for any total above the exemption amount is 40 percent. Here's what an inheritance might look like when taking both the Unified Tax Credit and inheritance tax laws into account:
- You leave a family member $12.7 million.
- The Unified Tax Credit exempts $11.7 million.
- That leaves $1 million above the exemption.
- That $1 million is taxed at a rate of 40 percent ($400,000).
- The person receiving the inheritance/gift receives the full $11.7 million with an additional $600,000 left over from the taxed $1 million.
Read More: How to Calculate an IRS Gift Tax
Annual Gift Exclusion for 2021
For 2021, the annual exclusion for gifts is $15,000. You're able to give $15,000 to up to 10 different people for a total of $150,000 going out of your accounts without the need to deal with taxes. However, you won't necessarily need to worry about paying taxes on those gifts if you haven't reached your lifetime exemption.
Read More: Three Types of Taxes
How the Unified Tax Credit Helps Taxpayers in 2021
The big perk of the unified credit is that it allows you to reduce your annual taxable income each year while giving those you love the inheritance money that is meant for them. Many people use this approach instead of simply waiting to give their children their full inheritances after death.
Through gifting, you're able to allow your loved ones to enjoy funds that they can use now. The added perk is that you're actually growing the inheritance because you're reducing your annual tax burden to be able to keep more money.
Some other ways to give away money to reduce your annual tax burden includes giving to IRS-approved charitable organizations, gifting money to your spouse, covering someone's tuition or covering another person's medical expenses through gifts paid directly to service providers.
Read More: Tax Credits: What Are They & How Do You Qualify?