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What is the applicable exclusion amount?

The applicable exclusion amount effectively exempts a certain amount from the federal gift and estate tax. In other words, if you are a U.S. citizen or resident, you will be able to leave a certain amount of your property free from this tax

Here is the current table:

Estates of those who die during: The applicable exclusion amount is:
2009 $3.5 million
2010 $5 million (however, estates can elect out of the estate tax)
2011 $5 million
2012 $5 million, indexed for inflation
2013 and thereafter $1 million (unless Congress enacts further legislation)

Generally, any portion of the applicable exclusion amount used for gift tax purposes effectively reduces the applicable exclusion amount that will be available for estate tax purposes.

It is especially important for spouses to understand the applicable exclusion amount. For 2011 and 2012, the applicable exclusion amount is portable. That means that each spouse is entitled to an applicable exclusion amount (referred in this context as the basic exclusion amount). If the estate of the first spouse to die does not use all of its basic exclusion amount, the executor can elect to transfer the unused portion to the surviving spouse. The surviving spouse's estate can then add this unused portion to its own basic exclusion amount. The sum is referred to as the applicable exclusion amount. So, for example, say that Husband dies in 2011 and his estate uses $3 million of its basic exclusion amount, and the executor of the Husband's estate elects to transfer the balance of $2 million to the Wife. The Wife dies in 2012. Her estate is entitled to an applicable exclusion amount of approximately $7 million (her own basic exclusion amount of $5 million, indexed for inflation, plus Husband's unused portion of $2 million).

Note: The applicable exclusion amount is scheduled to drop to $1 million in 2013, and portability expires, unless Congress enacts further legislation.