The Tax Cuts and Jobs Act raised the threshold for gift and estate tax exemptions, allowing people to give more of their estate away without being subject to federal estate taxes. This provision is set to expire soon, with big implications for estate planning. You may need new strategies going forward.
The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) was passed in late 2017 and signed into law on January 1, 2018. It represented a major overhaul of the tax code, with significant implications for both individuals and businesses.
Among the many changes was a large increase in lifetime gift and estate tax exemptions. Federal tax is due on large gifts given during a person’s lifetime and on large estates after a person’s death. The exact cutoff depends on the basic exclusion amount, which is the current tax exemption for gifts and estates.
The IRS says the TCJA doubled the basic exclusion amount for lifetime gifts and estates, with adjustments each year for inflation:
- In 2017, before the implementation of the TCJA, the exemption amount was $5 million.
- In 2018, it increased to $11.18, due to the TCJA. In 2019, it increased to $11.4 million, due to the TCJA and the inflation increase.
- In 2025, the basic exclusion amount is $13.99 million.
- In 2026, the basic exclusion amount is set to return to $5 million, due to the sunsetting of the TCJA provision.
Under these rules, an individual can make a lifetime gift or have an estate of nearly $14 million in 2025 without having to pay federal taxes. However, the person would owe taxes on a lifetime gift or estate of the same amount in 2026.
Gifts Made Between 2018 and 2025
The IRS has clarified that gifts made between 2018 and 2025 to take advantage of higher basic exclusion amount will not be affected after 2025, when the basic exclusion amount reverts to the lower threshold. To illustrate this point, the IRS gives the following example involving a hypothetical donor called A:
“Before 2018, A had never made a taxable gift. In 2018 when the BEA is $11.18 million, A makes a taxable gift of $9 million. A uses $9 million of the available BEA to reduce the gift tax to zero. A dies in 2026. Even if the BEA is lower that year, A’s estate can still base its estate tax calculation on the higher $9 million of BEA that was used in 2018.”
Who Do the Estate Tax Exemptions Affect?
Most estates are not large enough to trigger estate taxes, and the funds collected this way are relatively small. The Bipartisan Policy Center says estate tax collections account for less than 1% of all projected federal revenues. In 2024, only around 7,000 returns are expected to pay estate taxes. However, if the thresholds revert to pre-TCJA levels, approximately 19,000 returns could owe estate taxes in 2026.
Will the TCJA Estate Exemptions Actually Sunset?
It’s impossible to say what will happen to the tax code in the future. Although the higher estate tax exemptions are set to expire at the end of 2025, it is possible the TCJA thresholds will be extended or a new law will alter the basic exclusion amount in another way. However, until such laws have passed, it’s prudent to work under the assumption that the higher thresholds will sunset in accordance with the current schedule.
Maximizing Your Legacy in Light of Changing Rules
The average person wants as much of their estate as possible to go to his or her heirs, rather than the government. However, estate tax may take a major bite out of an estate, leaving heirs with less. If the TCJA estate exemptions sunset as planned, people will be able to give less to their heirs because more of their estate will go to taxes.
The deadline is approaching fast. People with large net worths should reassess their estate planning strategies in 2025. This may involve taking advantage of the higher basic exclusion amount to give more substantial gifts in 2025 or the use of other strategies, such trusts and life insurance.
An estate planning attorney will help you understand your options and develop a strategy to maximize your legacy. Contact Skinner Law.