2020: Provided the World Doesn’t End, We’ll Enjoy an Increased Lifetime Gift and Estate Tax Exclusion

Whether society’s collective interpretation of the Mayan calendar proves correct and the world ends in 2020 remains unknown, for now. Despite this looming uncertainty, take comfort in the knowledge that, should we survive another pending apocalypse, the IRS has remained steadfast and will once again increase the lifetime gift and estate tax exclusion for the year.

Ordinarily, transfers of wealth to a recipient by means of gift or estate are taxable to the donor. However, two types of exclusions exist to limit the tax on such transfers: the lifetime exclusion and the annual exclusion. The lifetime exclusion allows an individual donor to give away a certain amount of funds, tax-free, over the course of his or her lifetime. The annual exclusion allows a donor to give away a certain amount of funds tax-free per individual recipient each year. If the value of funds given in one year falls under the annual exclusion, the lifetime exclusion is unaffected.

The threshold for these transfers typically increases with inflation each year. As 2019 draws to a close, it’s timely to take a look at next year’s exclusion amounts.

Under Rev. Proc. 2019-44, for the year 2020, the lifetime exclusion on estate/gift tax will increase from $11,400,000 to $11,580,000. This means that transfers of wealth up to $11,580,000/individual and $23,160,000/married couple, over the duration of the donor’s lifetime, is nontaxable.

There’s also an annual exclusion that permits the tax-free transfer of $15,000, per recipient, for tax year 2020. If a donor transmits wealth at or below $15K, that transfer will not count toward the lifetime exclusion of $11,580,000. Note that the annual exclusion can only increase for inflation in $1,000 increments. It remains unchanged from 2019.

As an example:

Jamie, with donative intent spurred by the holiday spirit, wants to give Lauren, an unrelated recipient, a cash gift in the amount of $20,000 in December of 2020.

Jamie has given Lauren no other gifts during 2020, so $15,000 of the gift falls under the annual exclusion and is not taxable to Jamie.

The remaining $5,000 that exceeds the annual exclusion will count against Jamie’s lifetime exclusion and reduces the amount Jamie can gift tax-free during her remaining lifetime. After this gift, Jamie may now give only $11,575,000 in tax-free gifts over the course of her lifetime, assuming no other taxable gifts were made in prior years.

Feel free to reach out to our office with any related tax questions. Whether the world will end in 2020, however, we suggest that you inquire elsewhere.

 

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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