The Tax Cuts and Jobs Act of 2017 (TCJA) made some significant changes to federal estate and gift tax lifetime exclusion amounts. However, the TCJA fell short of repealing federal death taxes, and leaves the door open for Congress to decrease (or increase) the exclusions, or increase (or decrease) estate and gift tax rates, at any time. Unfortunately, the 3.8% Net Investment Income Tax, which affects married couples with incomes exceeding $250,000 and trusts or estates with retained income exceeding $12,750 (for tax year 2019), is likely to remain until the Affordable Care Act is repealed or amended.
Substantial lifetime exclusion amount for estate and gift taxes
Our current federal Internal Revenue Code “unifies” the estate tax and the gift tax, providing for a combined tax credit that allows people both to make taxable gifts during their lifetimes and to transfer estate property to heirs at their deaths free of federal taxes up to a certain total amount. That amount increases each year to adjust for inflation, and for persons dying in 2020, the exclusion amount will be $11.58 million.
You might think this amount is high enough to prevent you from having to think about federal estate taxes. However, keep in mind that Congress could lower the exclusion amount at any time. (Indeed, if Congress does nothing, it will automatically revert to $5.49 million on January 1, 2026.) Furthermore, the federal death tax exclusion amount includes not just the value of financial assets and real estate that you own yourself (personally, or in your Living Trust), but also the payout values of your retirement plans and any life insurance that you own at your death. When calculating how close you are to taxability, be sure to include the value of any death benefits and group life insurance that your employer might provide.
Increase in the annual exclusion amount for gifts
The Code’s gift tax provisions are written to apply to even small gifts. However, Congress in its beneficence has provide for an “annual exclusion” that exempts from gift taxation and reporting gifts up to a specified amount. That amount is also adjusted for inflation, but only when thousand-dollar increments are exceeded. For 2020, the annual exclusion remains at $15,000.
A few reminders about the annual gift tax exclusion. First, you can give up to $15,000 to as many different people as you want. So if your estate is at, above, or near the lifetime exclusion amount mentioned above, making annual gifts to your children, grandchildren, nieces and nephews might be a good way to make sure they come to visit you often (as well as keeping your family’s money out of Uncle Sam’s wallet).
Also, there are several categories of gifts that can exceed this amount without incurring gift taxes or using up your lifetime exemption. Most people can make unlimited tax-free gifts to their spouses (except for noncitizen spouses – tax-free gifts to them are limited to $157,000 in 2020). Moreover, money you spend on medical care or education for someone else isn’t treated as a taxable gift so long as you pay the school, college, or medical care provider directly. (Directly means you write the check or incur the credit charge. Reimbursements of other people’s payments don’t qualify.)
As always, contact me if you have any questions about maximizing or using your lifetime or annual exclusions from estate and gift taxes.
[Revised: January 1, 2020]