In an earlier Tip I mentioned the exemptions that are available to reduce or avoid both estate tax and gift tax on the Federal level.
We are revisiting this topic because of recent announcements by the IRS as to increases in these exemptions.
In the earlier examination of this area, I stated the exemptions that exist to avoid the obligation to pay estate tax. That is, on the Federal level, the estate tax exemption was $12,920,000 in 2023. However, the exemption was recently increased to $13,610,000. This is “good news” to avoid that much more in estate tax for larger estates.
The “bad news” is this exemption, if Congress and the President do not act to change the position, will be reduced, after the end of 2025, to $5,000,000 (as adjusted up for inflation). This automatic change back to this lower amount is the result of how the law was temporarily changed for this exemption under the Tax Cuts and Jobs Act of 2017.
This difference is obviously important. The tax rate, where the tax applies, is substantial! The rate is 40% on the taxable amount. The Biden Administration has supported a change to move the rate to 45%. Thus, taxpayers need to be aware of these possible changes and plan accordingly, to the extent it is possible to reduce such tax.
The gift tax and estate tax are unified. Thus, the exemption noted above can be used during life to reduce the gift tax or on death to reduce the estate tax. Of course, they can be used together, subject to the maximum exemption amount discussed above.
A concomitant change with the estate/gift tax unified lifetime exemption is the increase in the annual gift tax exemption. As I mentioned in a prior tip, the annual exclusion, as distinguished from the lifetime unified exemption discussed above, was $17,000 per person that the donor could use to avoid gift tax because of a gift (life transfer). This amount was increased for 2024 to $18,000 per gift, per person.
These important and recent changes can help taxpayers to move assets from their ownership to others that are favored by the donor. What changes will occur in these areas remains to be seen in 2024, especially with all the other issues being addressed by Congress in 2024, with particular emphasis on the coming 2024 elections.
Mark Lee Levine, Professor, University of Denver