The federal estate tax is not a factor for most people because there is an exclusion that is pretty high relative to most estates. This is a set amount that can be transferred tax-free — the tax is only levied on any portion of an estate that exceeds it.
There are annual adjustments to account for inflation, and we have experienced a significant level of inflation this year. The 2022 exclusion amount has been announced, and we will take a look at it here.
2022 Federal Estate Tax Exclusion
For the rest of 2021, the exclusion is $11.7 million. This figure came about because of the enactment of the Tax Cuts and Jobs Act in December of 2017. The exclusion had been $5 million adjusted for inflation since 2011, and it was doubled through a provision in this act.
An inflation adjustment resulted in $11.18 million exclusion for 2018, and it has risen incrementally since then. The IRS has announced the adjustment for 2022, and it will exceed $12 million for the first time. It will be $12.06 million when the new year rolls around.
The top rate of this tax is 40 percent so the tax is a very big deal for those who are exposed.
As long as you are married to an American citizen, you can transfer any amount of property to your spouse tax-free because there is an unlimited marital deduction. A surviving spouse can keep his or her deceased spouse’s exclusion so they the surviving spouse’s estate can use it at the surviving spouse’s death.
Gift Tax Exemption Increase
A federal gift tax was put into place in 1924, and it was repealed in 1926, but it was reenacted for good in 1932. The two taxes are unified under the tax code so the multimillion-dollar exclusion applies to taxable gifts and your estate.
You cannot give away all of your estate tax-free while you are living to get around the estate tax, but there is some latitude. There is a separate annual gift tax exemption that can be used to give gifts to others tax-free manner without using any portion of the unified exclusion.
Since 2018, the annual gift tax exemption has been $15,000 per person, but it is going up to $16,000 next year.
The Clock Is Ticking
From an estate planning perspective, these are the best of times for people that have accumulated a great deal of wealth, but things are about to change. The provision in the Tax Cuts and Jobs Act that set the exclusion at over $11 million will sunset or expire on January 1, 2026.
In 2017 when the measure was passed, the exclusion was $5.49 million, and it will return to this level indexed for inflation upon the expiration of the provision (if Congress doesn’t change the law first). When you put all this together, you can see that time is of the essence.
The record high exclusion can be used to give gifts or fund certain types of trusts at some point during the next few years before the exclusion plummets.
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