Unified Credit

The estate, gift and generation skipping tax for 2011 and 2012 was 35 percent. The estate and generation skipping tax was scheduled to be restored to only $1 million on January 1, 2013 with amounts over $1 million to be tax at the marginal rate of 55 percent.   Each individual is allowed a unified credit against the federal gift and/or estate tax liability. The amount exempted from tax by the unified credit (the 'applicable exclusion amount' of the credit) was $5 million in 2011 and $5.2 million in 2012.  The increase in the exclusion amount is due to an adjustment on the $5 million base for inflation.

On January 3, 2013, the president signed the “American Taxpayer Relief Act of 2012”.  This bill, commonly referred to as the Fiscal Cliff Deal, set the exclusion amount for federal estate taxes in 2013 at $5.25 million.   This credit means that if you passed away in 2013, the first $5.25 million of your taxable estate will be exempt from federal estate taxation.  You are actually receiving a credit which effectively exempts a total of $5.25 million in cumulative taxable transfers made by you (by lifetime gifts as well as transfers at your death). 

Simply put, if you die in 2013, after calculating deductions and credits, the first $5.25 million in assets you own will not be subject to estate tax.  If the amount of your taxable estate is above $5.25 million, your estate will be subject to federal taxation at the marginal rate of 40%.   The Fiscal Cliff Deal also put in place exclusion amounts and marginal tax rates for gifts, and generation skipping transfers at the same figures set for federal estate tax (see Gift Tax and Generation Skipping Transfer Tax).

And in 2014, for transfers made at death (40% tax rate) and those made during your life, (40% maximum tax rate) the exclusion amount will be $5,340,000, up from the $5,250,000 from 2013.  For spouses, that exclusion amount is $10,680,000 of which (assuming the surviving spouse hung on to it all) that the surviving spouse could pass to beneficiaries without being subject to the estate tax.  The Generation Skipping Transfer Tax also increased to $5,340,000 (40% maximum tax rate) and the Annual Exclusion (0 tax) amount remains at $14,000.  Parents who take advantage of gift-splitting can increase this amount to $28,000.  For those with foreign spouses, the foreign earned income exclusion amount was increased to $99,200 from $97,600.