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‘Tis The Season To Give (Less to the IRS)
The IRS taxes gifts from one individual to another in several ways, including the estate tax and the gift tax. Recently, Congress passed and the president signed the Tax Cut and Jobs Act, Pub. L. No. 115-97 (the “TCJA”). Among other provisions, the TCJA contained tax code changes that taxpayers should consider as part of their estate planning.
WHAT ARE THE NEW LIMITS ON TRANSFERS?
Prior to the TCJA, the lifetime gift and estate tax exemption was computed off a base of $5,000,000 per taxpayer, adjusted for inflation. In 2017, the adjusted lifetime exemption was $5,490,000 per taxpayer. The TCJA doubled the lifetime exemption, meaning each individual taxpayer’s lifetime transfer tax exemption is computed off a base amount of $10,000,000. On March 2, 2018, the IRS announced that the 2018 exemption amount, adjusted for inflation, is $11,180,000. Because that amount is calculated per taxpayer, a couple can transfer twice the limit—$22,360,000 in 2018—without paying taxes. Transfers above the lifetime gift and estate tax exemption are taxed at a rate of 40 percent.
The lifetime exemption operates in conjunction with an annual gift tax exclusion. The annual exclusion allows taxpayers to make certain gifts up to a specific amount each year without eroding that taxpayer’s lifetime exemption amount. If a taxpayer gives more than the annual gift tax exclusion in any given year, that taxpayer begins to eat into his or her lifetime gift and estate tax exemption.
The annual exclusion is subject to inflation adjustments, but only when the cumulative inflation adds up to a $1,000 increase in the exclusion. Between 2013 and 2017, the annual exclusion per person was $14,000. In 2018, the annual exclusion rose to $15,000. 1
HOW CAN YOU TAKE ADVANTAGE OF THE INCREASED EXEMPTIONS BEFORE THEY EXPIRE?
The majority of Americans will be able to transfer their assets without running up against the limits of the lifetime exemption. If you are one of the fortunate few who may be in a position to give more than the lifetime exemption, you should consider some strategies to maximize your giving and minimize your taxes. 2
Notably, the TCJA’s increased exemption level is only effective through 2025. Unless Congress acts again to raise the exemption level, the exemption will revert to its old formula on January 1, 2026. Thus, if you are considering a major gift, you should also consider whether you should make that gift prior to the expiration of the increased lifetime exemption level.
Many people have concerns about giving away assets early. Of course, before you transfer any asset, you should make sure you leave yourself enough to live on comfortably. In addition, if you are concerned the person receiving the gift may not be ready to handle the responsibility that comes with it, you can consider creating a trust. Trusts allow you to set specific rules on the use of assets and appoint trusted people or professionals to control and manage them. Each state has its own rules governing trusts, so if you are considering creating a trust, you should talk to an experienced estate planning attorney or professional.
Each individual’s estate planning situation is unique. However, as you review your estate planning, you should consider whether you want to take advantage of the TCJA’s changes to the lifetime exemption and whether other giving options make sense for you.
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