Tax Reform for Individuals: Estate and Gift Tax Increases
The Tax Cuts and Jobs Act has the estate and gift tax exemptions on the rise. These exemption increases may provide the opportunity for further tax planning. Below we highlight what changed for estate and gift tax under the new tax law.
For 2017, the previous tax code provided that a single taxpayer may gift up to $5.49 million, indexed for inflation, in their lifetime before becoming subject to gift tax. This lifetime threshold would only be reduced if the taxpayer gifted more than the annual gift tax exclusion of $14,000.
The new tax bill provides an increased benefit when it comes to the estate and gift taxes. Tax reform has drastically increase the estate and gift tax exemption from $5.49 million in 2017 to $11.18 million in 2018 for an individual. The exemption is also indexed for inflation and is set to rise to $11.4 million in 2019. Beginning after 2025, the exemption amount will revert back to the pre-2018 level of $5 million, indexed for inflation.
The annual gift tax exclusion increased to $15,000 in 2018 compared to $14,000 in 2017. If a taxpayer gifts more than $15,000 to a single person, the excess will reduce their lifetime gift exemption of $11.18 million. Lifetime gifts that exceed the lifetime gift exemption are taxed at 40%.
The IRS issued proposed regulations to clarify the computation of estate tax payable in situations where the lifetime exclusion was different in the year of death than when prior gifts were made. The individual is allowed to use the larger of the lifetime exemption on the date of the decedent’s death or the total amount of lifetime exemption used in determining taxable gifts during the taxpayer’s lifetime.
Impact on Individuals
This individual tax reform provision is set to sunset at the beginning of 2026. This provides a limited window to allow a couple the opportunity to utilize the larger lifetime exclusion. It could be very beneficial to make these gifts while the new tax law is in place.
With such high thresholds, the vast majority of estates will not be subject to the estate tax. Please keep in mind some states have their own estate and inheritance tax which should be considered. Focus may shift to keeping assets in estates to benefit from the step-up in basis and reducing income tax for heirs. Because the exemption has increased substantially, prior estate planning should be revisited to ensure your estate plan reflects any changes in the law.