Federal Tax Law Changes on Estate and Gift Tax
Through December 31, 2017, each person had an exemption of up to $5.49 million against federal gift, estate or generation-skipping transfer taxes. Spouses could transfer a total of $10.98 million. Transfers in excess of the exemption were subject to tax at a rate of 40 percent.
Beginning with gifts or deaths on or after January 1, 2018, the new tax reform act (H.R. 1), signed into law by President Trump on December 22, 2017, doubles the exemption amount to approximately $11.2 million per person, adjusted annually for inflation, or $22.4 million for spouses. The increased exemption expires at the end of 2025. The 40 percent tax rate continues to apply to transfers in excess of the exemption amount.
The “portability” of a deceased spouse’s unused exclusion amount is still available to a surviving spouse, meaning spouses with a combined estate up to approximately $22.4 million in value at the time of the survivor’s death will not pay estate tax with the proper planning and estate tax return elections.
Beginning on January 1, 2026, the exemptions revert to the current $5 million exemption (still indexed for inflation) unless Congress acts to extend them. Regulations will confirm that gifts made during this period (2018-2025) up to the increased exemption amounts will not later be subject to tax if the exemptions are reduced, (i.e., no “clawback”).
The basis step-up rules, adjusting the basis of any asset passing from a decedent to the fair market value of that asset as of the decedent’s date of death, continue to apply.
Also, in 2018, the annual gift tax exclusion increases to $15,000 (a married couple may make gifts of $30,000 per recipient). This change is due to inflation and not the new legislation.
Endnotes
Source: “Changes to Estate and Gift Taxes in the New Tax Law” by Debra T. Hirsch, January 1, 2018.
