IRS Assures Taxpayers of Estate and Gift Tax Exclusions Through 2025 by Tony Gutierrez, CPA
The IRS issued final regulations confirming that taxpayers who take advantage of the increased gift and estate tax exemptions in effect temporarily under the new tax law until 2026 will not be subject to tax in later years when the generous provision is set to expire. The announcement allays fears that tax-free gifts made today could be “clawed back” to an individual’s taxable estate when he or she passes away in future years.
The Tax Cuts and Jobs Act (TCJA) doubled the basic exclusion amount (BEA) that individual taxpayers may transfer to heirs during life or at death without incurring federal estate or gift taxes from $5 million in 2017 to $10 million for tax years 2018 through 2025, with adjustments for inflation. For 2020, the exemption is $11.58 million for individual taxpayers or $23.6 million for married couples filing joint returns. Anything above these amounts are subject to tax at a 40 percent rate. However, this provision of the law is scheduled to sunset on Jan. 1, 2026, at which time the exemption will revert to pre-TCJA level of $5 million.
The final regulations explain that the higher exemption amount is a “use it or lose it” benefit that applies only to decedents who make actual gifts between 2018 and 2025. As an example, the regulation considers a taxpayer who made a gift of $9 million in 2018 (when the exemption was $11.2 million), and who passes away in 2026, when the higher exemption amount no longer applies. Under these circumstances, the full $9 million gift would forever be exempt from tax because the credit to be applied in computing estate tax in the decedent’s estate is based upon the higher exemption amount in effect at the time of the gift.
With this clarification from the IRS, taxpayers also receive reassurance that they will continue to receive the tax benefit of the higher exclusion amount even if the political winds change and a new president takes action to reduce these levels in the future.
About the Author: Tony Gutierrez, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he focuses on tax and estate planning for high-net-worth individuals, family offices, and closely held businesses in the U.S. and abroad. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of the law and subsequent guidance issued by the Internal Revenue Service.
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