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Big News for Business Owners: Estate Tax Exemption Doubled by Tax Reform

Big News for Business Owners: Estate Tax Exemption Doubled by Tax Reform

The passage of the tax reform act has brought significant changes to many areas of the tax code, not the least of which involve the estate tax. Though it was initially anticipated that the estate and gift tax would be lifted entirely, instead what Congress did was to leave the gift tax untouched and to double the value at which an estate would be excluded from the 40 percent tax. The effect of this was not only that the number of estates subject to the tax was lowered, but that even those with estates high enough to be taxed would be taxed at a lower rate.

Back in 2010, the threshold for exclusion from the estate tax was raised to $5 million with an annual adjustment for inflation. The effect of this was that in the tax year 2017, estates of $5.49 million or less were excluded from having to pay the estate tax. As of 2018, the $5 million exclusion amount established in 2010 was doubled and inflation adjusted, raising this year’s exclusion to $11,180,000.

Should an estate’s value exceed $11,180,000, Estate Tax Return (Form 706) needs to be completed and filed. It’s important to remember that several years ago a portability provision was established by Congress, allowing a surviving spouse that inherits the estate of their deceased spouse to also inherit any unused estate tax exclusion. Form 706 has to be filled out for that to happen as well.

Because Form 706 filings often generate a complicated and time-consuming request for an appraisal of the deceased spouse’s assets, many surviving spouses don’t want to be bothered with the process. This is especially true if they feel that the estate’s value falls short of the exclusion amount. Though this is understandable, in doing so they forfeit the portability of the deceased spouse’s unused exclusion and sometimes leave themselves open to the possibility of tax implications in the future. If, for example, they end up winning the lottery or inheriting money from elsewhere, or if Congress makes a change in the future to lower the exclusion amount, the result could be a tax liability that would otherwise have been avoided. This can leave a tax preparer vulnerable to being questioned by beneficiaries, or even being held liable, as to why Form 706 wasn’t filled out, so be understanding if your tax preparer asks you to sign a statement confirming that you opted out of the portability option.

As referenced above, the annual gift tax exclusion was not revised under the Act, and in fact, was increased from $14,000 in 2017 to $15,000 in 2018.

While reviewing your tax status in terms of the estate tax and the annual gift tax exclusion, take a moment to review the information in your bank accounts, brokerage accounts, and retirement accounts. Changes to marital status, births, and deaths can have an impact on your decisions about beneficiaries, so make sure that everything is still accurate and reflects your wishes.

Martinez & Shanken, PLLC writes for TaxBuzz, a tax news and advice website. Reach the firm at [email protected]

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Julie Farless

Julie Farless

Martinez & Shanken, PLLC is a Certified Public Accountant (CPA) firm based in Gilbert, Arizona. We provide a full range of accounting, bookkeeping, consulting, outsourcing and business services, but we specialize in tax preparation. We work with you to ensure that your personal or business processes are conducted in a manner that ensures ongoing integrity in your financial transactions. We are available to answer your questions and help with your ongoing tax planning and changing business needs.

Deborah Martinez & Earl Shanken
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Arizona

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