The federal estate tax exclusion is the amount that can be transferred before the remainder would potentially be subject to taxation. There was an estate tax repeal in 2010 because of a provision in the Bush era tax cuts. On December 17th of that year, the playing field changed when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was enacted.
It established a $5 million estate tax exclusion, and that figure indexed for inflation remained in place through 2017. At the end of that year, the Tax Cuts and Jobs Act was approved by Congress and signed into law by the president.
Among other things, this tax bill essentially doubled the estate tax exclusion amount. It was $5.49 million in 2017, and it went up to $11.18 million in 2018. This figure has remained in place with inflation adjustments since then. In 2022, it stands at $12.06 million.
If you are married, you can use the unlimited marital deduction to transfer any amount of property to your spouse tax-free as long as your spouse is an American citizen.
On the subject of marriage and the estate tax, the aforementioned 2011 tax act made the estate tax exclusion portable between spouses. This means that a surviving spouse can use their deceased spouse’s exclusion, and portability has been retained since then.
Federal Gift Tax
The knee-jerk response to the estate tax would be lifetime gift giving, but there is a gift tax in place to close that window of opportunity. It is unified with the estate tax, so you are using a portion of your unified gift and estate tax exclusion to give tax-free gifts while you are living
However, there is a caveat. You can transfer up to $16,000 to an unlimited number of individuals each year free of transfer taxes. This is a separate annual exclusion that does not impact your available gift and estate tax exclusion.
There is an educational exclusion that can be used to pay school tuition for others free of taxation. You are also allowed to pay medical bills for other people without being taxed, including ongoing health insurance premiums.
Sunset of Tax Cuts and Job Act
They say that all good things must come to an end, and this appears to be the case when it comes to the record high estate tax exclusion that we have right now. The provision in the Tax Cuts and Act that increased the exclusion is going to expire when the clock strikes 12 on January 1, 2026.
At that point, the exclusion will revert back to the 2017 level of $5.49 million with an inflation adjustment. When you process all this information, you will recognize an opportunity. You can give gifts between now and then while the unified exclusion is over $12 million.
Estate Tax Efficiency Strategies
In addition to direct gift giving, the exclusion can be used to fund certain types of tax efficiency trusts. We can gain understanding of your situation and explain your option so you can make fully informed decisions.
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