Estate and Gift Tax

The estate and gift tax is the pair of federal transfer taxes that reach what a person gives away during life and what passes at death, computed against one rate schedule and one lifetime exclusion. They sit in separate chapters of subtitle B of the Internal Revenue Code, chapter 11 for the estate tax and chapter 12 for the gift tax, and they are unified in the arithmetic rather than merged into a single levy. A dollar of lifetime giving therefore reduces what can pass free of tax at death, which is the single fact that decides most planning conversations.

Two Chapters, One Rate Schedule

The estate tax is imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States (26 U.S.C. 2001(a)). The schedule that prices it starts at 18 percent of the first $10,000 and tops out at $345,800 plus 40 percent of the excess over $1,000,000 (26 U.S.C. 2001(c)).

That schedule is not the estate tax’s alone. The gift tax computation runs the same section 2001(c) rates over cumulative lifetime gifts, and how it does that, year by year, is worked through in gift tax.

The Estate Computation Counts the Gifts First

The estate tax is a subtraction, not a single application of the schedule. The tax imposed by section 2001 is the excess, if any, of a tentative tax computed under subsection (c) on the sum of the taxable estate and the amount of the adjusted taxable gifts, over the aggregate amount of tax which would have been payable under chapter 12 with respect to gifts made by the decedent after December 31, 1976, if the modifications described in subsection (g) had been applicable at the time of those gifts (26 U.S.C. 2001(b)).

Both limbs do work. The first runs the schedule over the estate plus a lifetime of giving. The second backs out the gift tax that giving would have generated. What is left is the estate tax, and the effect is that earlier gifts are not taxed twice but do push the estate further up the schedule.

The term in the middle is defined narrowly, and only for the limb it sits in. For purposes of paragraph (1)(B), adjusted taxable gifts means the total amount of the taxable gifts, within the meaning of section 2503, made by the decedent after December 31, 1976, other than gifts which are includible in the gross estate of the decedent (26 U.S.C. 2001(b)). A gift pulled back into the gross estate is counted once, on the estate side, not on both.

The Exclusion Is a Credit, and It Is Shared

Nothing in chapter 11 exempts an amount outright. A credit of the applicable credit amount is allowed to the estate of every decedent against the tax imposed by section 2001 (26 U.S.C. 2010(a)), and, for purposes of that section, the applicable credit amount is the tentative tax which would be determined under section 2001(c) if the amount it were computed on were equal to the applicable exclusion amount (26 U.S.C. 2010(c)(1)). The exclusion is the input to a credit, which is why an estate below it still computes a tax and then erases it.

For purposes of that subsection, the applicable exclusion amount is the sum of the basic exclusion amount and, in the case of a surviving spouse, the deceased spousal unused exclusion amount (26 U.S.C. 2010(c)(2)). The basic exclusion amount is $15,000,000, a figure Public Law 119-21 substituted for the prior amount and applied to estates of decedents dying and gifts made after December 31, 2025 (26 U.S.C. 2010(c)(3)(A) and the note to section 2010). It is indexed only prospectively: for a decedent dying in a calendar year after 2026 the dollar amount is increased by that dollar amount multiplied by the cost-of-living adjustment determined under section 1(f)(3) for that year, substituting calendar year 2025 for calendar year 2016, and any adjusted amount that is not already a multiple of $10,000 is rounded to the nearest multiple of $10,000 (26 U.S.C. 2010(c)(3)(B)).

The gift side draws on the same figure rather than on one of its own. A citizen or resident is allowed a credit against the tax imposed by section 2501 for each calendar year equal to the applicable credit amount in effect under section 2010(c) which would apply if the donor died as of the end of the calendar year, reduced by the sum of the amounts allowable as a credit to the individual under section 2505 itself for all preceding calendar periods (26 U.S.C. 2505(a)). That reduction is the unification. Credit spent on gifts is credit that is no longer there at death. How the lifetime figure differs from the separate per-recipient annual amount is covered in gift tax exclusion.

Portability Is an Election, Not a Default

A surviving spouse can add the first spouse’s unused exclusion, but only through a filing the estate has to make on purpose.

For a surviving spouse of a deceased spouse dying after December 31, 2010, the deceased spousal unused exclusion amount is the lesser of the basic exclusion amount, or the excess of the applicable exclusion amount of the last deceased spouse of the surviving spouse over the amount with respect to which the tentative tax is determined under section 2001(b)(1) on that deceased spouse’s estate (26 U.S.C. 2010(c)(4)).

The condition is strict on three counts. The amount may not be taken into account by a surviving spouse under paragraph (2) unless the executor of the deceased spouse’s estate files an estate tax return on which the amount is computed and makes an election on that return, the election once made is irrevocable, and no election may be made if the return is filed after the time prescribed by law, including extensions, for filing it (26 U.S.C. 2010(c)(5)(A)). An estate that owed no tax and skipped the return has, by that choice, dropped the exclusion.

When a Return Is Required

The estate return threshold is the exclusion itself. Where the gross estate at the death of a citizen or resident exceeds the basic exclusion amount in effect under section 2010(c) for the calendar year which includes the date of death, the executor shall make a return (26 U.S.C. 6018(a)(1)). For the estate of a nonresident not a citizen of the United States, the trigger is that part of the gross estate situated in the United States exceeding $60,000 (26 U.S.C. 6018(a)(2)). Both thresholds are reduced, but not below zero, by the adjusted taxable gifts made after December 31, 1976 and by the aggregate amount allowed as a specific exemption under section 2521, as in effect before its repeal, for gifts made after September 8, 1976 (26 U.S.C. 6018(a)(3)).

The two returns run on unrelated clocks. An estate tax return is filed within 9 months after the date of the decedent’s death, while a gift tax return is filed on or before the 15th day of April following the close of the calendar year (26 U.S.C. 6075(a) and 6075(b)(1)). Any extension granted for filing the subtitle A income tax return for a taxable year which is a calendar year is deemed to extend the gift tax return for that year as well (26 U.S.C. 6075(b)(2)). In the year the donor dies both of those give way: notwithstanding paragraphs (1) and (2), the gift tax return for the calendar year which includes the date of death shall not be later than the time, including extensions, for filing the estate tax return for that donor (26 U.S.C. 6075(b)(3)).

Where a US Firm Meets It

Most firms meet the estate and gift tax through the records rather than through the return. Prior gift history decides the current computation, so a client taken on mid-life brings a question about every year since 1976, not just this one. Where a transfer’s value is contested, the number itself is an appraisal question worked through in valuation. Whether the client is inside chapter 11 at all turns on residence in the transfer tax sense, which domicile sets out. And the basis the heirs take is a separate rule from the tax on the transfer, covered in step up basis.

Common Questions

Accountably places trained offshore tax preparers inside US CPA and EA firms, working under the firm’s own review, and a firm can put a block of its own return work through a trial task before a client file depends on it.