Few estates have been subject to federal estate tax since the enactment of the Tax Cuts and Jobs Act of 2017. The federal estate tax applies to the portion of the estate’s value that exceeds the exemption amount.
Effective as of January 1, 2018, the Tax Cuts and Jobs Act more than doubled the size of the estate exemption amount from $5.49 million to $11.18 million, adjusted each year for inflation. The increased exemption essentially means that so long as your estate is valued at under the exemption amount, it will not pay any federal estate taxes and, consequently, individuals can gift more to their heirs during their lifetime or at their death tax-free.
In 2021, the exemption amount is $11.7 million for individuals, and that number is doubled for married couples to $23.4 million. Additionally, the annual gift tax exclusion provides an additional shelter. The annual gift tax exclusion allows you to gift up to $15,000 in 2021 without incurring any federal estate or gift tax and without deducting from the lifetime exemption amount.
What's Changing in 2022?
On November 10, 2021, the Internal Revenue Service announced that the estate tax exemption is going up again in 2022. In 2022, an individual can leave $12.06 million to heirs and pay no federal estate or gift tax, while a married couple can leave up to $24.12 million. Notably, for individuals or couples who have already maxed out their lifetime gifts in 2021, the increased exemption means that there is room for individuals or married couples to leave an additional $360,000 or $720,000, respectively, in 2022. The IRS also announced that the annual exclusion for gifts is increasing to $16,00—up from $15,000—in 2022. This means that individuals can gift up to $16,000 per year without touching any of their exemption amount.
Due to the sunset provision in the Tax Cuts and Jobs Act, however, the historically high exemption amount is scheduled to drop back to $5 million, adjusted for inflation, on January 1, 2026, absent an action by Congress.
In light of these announcements, individuals should review their current estate plans and work with their advisors on what steps should be taken to reduce or eliminate their estate tax. Should you wish to learn more or have any questions about your estate plan, please feel free to contact us at [email protected]
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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.