The federal estate tax exclusion is the amount that can be transferred before the estate tax would potentially be levied on the remainder. This figure is not permanently etched in stone because it can be changed by legislation.
Once an exclusion has been mandated, there are annual adjustments to account for inflation. Since the year is coming to an end, the news is out about the increase for 2021.
Throughout this year, the exclusion has been $11.48 million, and it is going up to $11.7 million next year.
Exclusion Sunset Date
The exclusion we have now is at record high level, and it has increased dramatically over the last 20 years. It was just $675,000 as recently as 2001, and the exclusion was $5.49 million in 2017. A provision contained within the Tax Cuts and Jobs Act provided the 100 percent increase that took effect in 2018.
The parameters that we have now are scheduled to expire or sunset at the end of 2025. If there are no legislative changes in the meantime, the exclusion would go back down to $5.49 million adjusted for inflation.
However, with changes in the presidency and Congress, a new tax law that would alter the current trajectory could be passed at any time. This is a fluid situation, and we will provide updates if any relevant news starts to circulate.
Rules for Married Couples
You do not have to worry about estate tax exposure when you are leaving assets to your spouse because there is an unlimited marital deduction. As long as you are married to a citizen of the United States, you can transfer any amount of property to your spouse tax-free.
In addition, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (H.R. 4853) was enacted in 2010, and among other things, it made the estate tax exclusion portable.
This means that a surviving spouse could use the exclusion that would have been available to the deceased spouse. Portability has been retained since then after a number of different tax acts have been signed into law.
Federal Gift Tax
Lifetime gift giving would make sense as a way to get around the estate tax, but this loophole has been closed since 1932. There has been a gift tax in place continuously since then, and it is unified with the estate tax.
The exclusion is a unified exclusion that would be reduced by the value of any gifts that you give tax-free while you are living, but there is a caveat to this statement.
In addition to the unified lifetime exclusion, there is a separate annual exclusion. You can give up to $15,000 to any number of people in a calendar year free of taxation without using any of your unified exclusion.
There is another exemption that allows you to pay school tuition for others tax-free, and you do not have to pay the gift tax if you pay medical bills for other people.
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You can schedule an appointment at our office in Charlotte or Huntersville, North Carolina if you call us at 704-944-3245. The number in Ashland, Kentucky is 606-3244-5516, and the number in Florence, Kentucky is 859-372-6655. Or you can fill out our contact form if you would prefer to send us a message.
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