IRS Announces a “Use it or Lose It” Provision for Current Estate and Gift Tax Exemptions
November 22, 2018
Earlier this week, the IRS announced that taxpayers taking advantage of the increased gift and estate tax exclusion amounts in effect between 2018 and 2025 will not be adversely impacted when the exclusion amount is scheduled to decrease to pre-2018 levels in 2025.
Gift Taxes, Estate Taxes and the Exclusion Amount
Gift and estate taxes apply to transfers of money, property, and other assets. These taxes are calculated using a unified rate schedule. Any tax due is determined after applying a credit based on an applicable exclusion amount.
A key feature of this exclusion is the basic exclusion amount (BEA). The credit is first applied against the gift tax, as taxable gifts are made. If any credit remains at death, it is applied against the estate tax to reduce or eliminate it.
Changes Under the Tax Cuts and Jobs Act
The Trump administration’s Tax Cuts and Jobs Act has increased the BEA and doubled the value of assets that can be transferred to heirs without triggering federal estate taxes or gift taxes for tax years 2018 to 2025.
Under the previous tax code, the exemption amount was $5.49 million for individuals. Under the new code, transfers can $11.18 million for an individual and $22.4 million for a married couple.
These amounts will increase in 2019 and may potentially increase further before the exemption expires in 2025, at which point the exemption will revert back to the 2017 levels as adjusted for inflation. Any transferred amounts that exceed the exemption levels will be taxed at 40%.
Concerns Following the Amendments
Tax lawyers and other tax professionals expressed concerns that this exemption was not permanent. For instance, what would happen if a taxpayer made a large gift between 2018 and 2025 and used up their exemption but then passed away after the exemption levels reverted back to the lower levels. Would the IRS then tax the gift?
The newly proposed regulations allow the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death. Essentially this amounts to a “use it or lose it” situation for taking advantage of the current exemption prior to 2025.
We will continue to follow developments in this matter. In the meantime, if you have questions about how these changes will affect your personal tax planning contact Feigenbaum Law. We are leaders in the field of tax law, and offer services to clients in the US, Canada and around the world. As a client, you will have peace of mind knowing that your matters are being handled by industry leaders with years of experience. We know taxes can be stressful, so we work with you to make your tax experience as simple and worry free as possible. Contact us to learn more about how we can help or call us at (905) 695-1269 or toll-free at (877) 275-4792.