Posted March 12, 2018
The estate and gift tax exemption in the federal tax code (Form 706) applies to an individual’s gifts made during life and to assets left at death. Beginning in 2018, the exemption from tax is doubling to nearly $11.2 million per individual and $22.4 million per married couple. This exemption, while it lasts, will be adjusted for inflation each year. The Urban-Brookings Tax Policy Center (TPC) estimates that for 2017, 5,300 estates owed estate taxes. With the doubling of the tax exemption starting in 2018, TPC estimates only 1,700 estates nationwide are expected to owe taxes out of about 2.7 million U.S. deaths.
One of the worst features of the new tax law from a financial planning perspective is the 2025 expiration date to these exemptions. It makes it very difficult for families to plan their gifting if they expect to be alive after 2025. More on this later in the article . . .
No Change in Capital Gains
Assets held at death are still not subject to capital-gains tax. This provision is frequently referred to as “the step-up in basis.” For example, Fred dies owning shares of stock worth $100 each in a taxable account rather than a tax-favored retirement account such as an IRA, and his cost-basis is only $5 per share. Because of the step-up in basis, Fred’s estate will not owe capital-gains tax on the $95 of growth for each share. Fred’s heirs will have a step-up in cost-basis to $100 as a starting point for measuring capital-gain or loss when they sell shares. If Fred’s heirs sell the stock for $100, they will owe no tax.
No Change in Portability of Unused Exemptions
If Fred dies in 2018 leaving an estate of $2 million to his heirs other than his wife Ginger, she can claim the $9.2 million of Fred’s unused exemption for her estate. Before 2026, Ginger’s individual estate tax exemption amounts to $11.2 million. At Fred’s death, he only used $2 million of his exemption so Ginger can add the unused exemption of $9.2 million to her individual exemption of $11.2 million resulting in a total estate tax exemption of $20.4 million for Ginger.
No Change in the Annual Gift Tax Exemption
The law still allows taxpayers to give annual gifts to anyone, including relatives, friends, and strangers. As already scheduled prior to the new tax law, the annual gift tax exemption has been increased for 2018 from $14,000 to $15,000. Above this annual limit the amount over $15,000 to each recipient is subtracted from an individual’s life-time exemption. Married couples can combine their exemption each year and give $30,000 to each recipient.
These annual gifts cannot be deducted from the giver’s income tax, but they do remove assets from the giver’s estate. The gifts are not taxable to the recipients. For example, Fred and Ginger have three married children and six grandchildren. The annual gift exemption is now $30,000 for Fred and Ginger to give their three children, their spouses, and their six grandchildren. This has the potential to remove $360,000 per year from Fred and Ginger’s estate.
From the planning perspective, Fred and Ginger and their heirs could get caught in a challenging position if they die after 2025, and they have given away more than the life-time exemption allows when the higher exemptions expire in 2025. This could result in a situation where the estate has to claw back gifts made to heirs for the purpose of paying a much higher estate tax because of the expiration. The original mandate of the new tax law was tax simplification. It failed.
Source: Wall Street Journal 2/14/2018
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The 2018 tax season is now upon us, and with that comes tax documentation to assist you in filing your return. All official tax reporting information will come directly from Schwab. Please see below for timelines (varies by document type). 1099 – Paper Mailing For retirement accounts, you should have already received your Form 1099-R. …Read More