Tax Planning

Will Gifts Now Using the Temporarily Increased Gift-Estate Exclusion Harm Estates after 2025?

by
Sonu Shukla
on
12/17/2018
Will Gifts Now Using the Temporarily Increased Gift-Estate Exclusion Harm Estates after 2025?

If you’re a high net-worth individual, you may be considering making significant gifts while you’re alive in order to minimize the amount of tax that will be assessed on your estate after you die. One of the most popular methods of doing that is by taking advantage of the gift rules that allow inflation-adjusted annual gifts that are excluded from taxes. For 2019 that amount is $15,000 per recipient. There is also a unified gift-estate exclusion amount that specifically applies to amounts over that $15,000 annual amount, and the amount of that exclusion was almost doubled in 2017 with the passage of tax reform. That dramatic expansion is temporary – it only applies between tax years 2018 and 2025, and though it offers attractive benefits to those with large estates, it has also raised questions about what happens to those who have taken advantage of its new allowance after the expansion period has expired. If a person goes ahead and bestows significant gifts on their beneficiaries during the short-term expansion, what happens when it has passed? Will the monies that they provided then end up subject to penalties or taxation, or minimize future opportunities?

To answer those concerns, the Treasury Department has indicated a new regulation that will allow those who take advantage of the 8-year annual gift expansion. In essence, the department has said that the tax benefit of the higher exclusion level will not be lost, even after the expansion period expires and the original, lower level limits are back in place.

The way that the system has traditionally worked, taxes on gifts have always been calculated based on a unified rate schedule. This schedule is used on all types of transfers, including property, assets, and cash, with whatever the applicable exclusion amount first applied as a credit to the figure to be taxed. That credit amount is generally whatever the statute allows, as well as other applicable elements. That amount offsets the gift tax, and if there is any credit leftover, it is then applied against any estate tax that may be owed. With the temporary expansion of the exclusion amount introduced by the 2017 Tax Cuts and Jobs Act, the credit for tax years 2018 through 2025 grew from $5 million to $10 million, and with an inflation adjustment, the effective amount for 2018 is actually $11.18 million and $11.4 million for 2019. It will not drop to $5 million until 2026. The good news for high-net value individuals who take advantage of the doubled value is that a special rule will allow the credit to be calculated at whichever exclusion amount is higher, the doubled exclusion amount that was in place or the amount that is applicable when the individual passes away.

For information on how the expanded gift exclusion applies to your situation, contact your tax professional.

Sonu Shukla, CPA writes for TaxBuzz, a tax news and advice website. Reach his office at [email protected].

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Sonu Shukla

Sonu Shukla

Sonu Shukla is a CPA, accountant, and tax preparer based in Orlando, FL. Sonu Shukla can assist you with your tax preparation and planning needs. Sonu is more than just another accountant in Orlando, Florida; he is a small business owner himself. It is a position in life that grants him the perspective and insight to emphasize with his clients, bringing them the best service possible. A Certified Public Accountant and a Certified Financial Planner, Sonu possesses the skills, education and experience to demonstrate unerring business acumen and passionately planned financial strategies. Being proactive is key for Sonu, tailoring highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out.

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