What is the applicable exclusion amount for the federal estate tax?

Each person is given a credit that may be applied to the amount of federal estate tax owed by that person at death, which is referred to as the “unified credit” due to its relation to both the federal estate tax and the federal gift tax.

The unified credit is a fixed dollar amount granted to every person’s estate that can be applied to the actual amount of federal estate tax that is owed by that estate. 

However, rather than discussing the unified credit, people often discuss the dollar amount of the taxable estate that the unified credit allows to pass free of the federal estate tax. This is known as the “applicable exclusion amount.”

The year of a person’s death determines the federal estate tax rate, along with the top tax rate and unified credit amount.

For instance, a unified credit amount of $780,800 was available to those who died during 2008, meaning that the value of an estate generating $780,800 of estate tax was permitted to be transferred from the estate free of the tax. The applicable exclusion amount during that same year was $2,000,000.

In other words, a $2,000,000 taxable estate will produce $780,800 of federal estate taxes, which is equal to the amount of the unified credit granted during 2008. This is comparable to saying that the $780,800 unified credit excludes $2,000,000 from the Federal estate tax.

Under EGTRRA (The Economic Growth and Tax Relief Reconciliation Act of 2001), the applicable exclusion amount varied for different years as the federal estate tax was scheduled to be phased out in 2010.

Basically, the dollar value of the taxable estate that is less than or equal to the applicable exclusion amount is free of tax and the amount of the taxable estate that exceeds the applicable exclusion amount is taxed at the top tax rate.

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