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New Regulations Indicate That Large Gifts Will Not Harm Future Estates

Posted on in Taxation Law

San Jose tax law attorney for estate taxes and TCJAWhen a large amount of money is transferred as a gift, there are certain gift taxes that apply. Similarly, funds left to heirs after an individual passes away are subject to estate taxes. Typically, a unified rate schedule is applied to an individual’s cumulative taxable gifts and/or estate in order to reach a net expected tax. The tax owed is determined after a credit contingent on an exclusion amount is applied. The basic exclusion amount (BEA) is first applied to the gift tax. Any remaining credit is then applied to the estate tax. The Tax Cuts and Jobs Act (TCJA) has instituted several major changes to the way gift tax and estate tax are calculated. If you are considering making a large gift in the next several years, read on to learn more about how these changes may affect you.

How the TCJA Changed Gift Taxes and Estate Taxes

The Tax Cuts and Jobs Act made far-reaching changes to United States tax law. One of these changes involves the basic exclusion amount that is applied to gift taxes and estate taxes. The TCJA temporarily doubled the BEA for the years 2018-2025. The BEA rose from $5 million to $10 million, or $11.18 million when adjusted for inflation. In 2026, the BEA is expected to return to the amount (after being adjusted for inflation) that it was before 2018. This means that you may currently leave just over $11 million to heirs without paying federal estate or gift tax. The annual gift exclusion remains $15,000.

IRS Clarifies How the Increased BEA Will Affect Taxpayers

Many taxpayers have expressed concerns about what will happen once the BEA returns to the pre-2018 amount. They worry that taking advantage of the increased BEA might negatively impact them in the future. In response, the IRS has issued a clarifying explanation. There is a special rule that allows estate tax credits to be calculated using either gifts made during a person’s life or the BEA applicable on their date of death – whichever is higher. If you want to make a large gift before 2026, you do not have to worry about losing the benefit of the increased BEA. Even if the basic exclusion amount has reverted to a lower dollar amount when a person dies than it was when s/he made a large gift, the gift tax portion of the estate tax calculation is still based on the higher BEA that previously applied.

Contact a San Jose, CA Estate Tax Lawyer

For high-quality legal guidance from an experienced San Jose tax attorney, contact John D. Teter Law Offices. Call our office at 408-866-1810 today to schedule a confidential consultation to discuss your needs.

Sources:

https://www.forbes.com/sites/ashleaebeling/2018/11/15/irs-announces-higher-2019-estate-and-gift-tax-limits/#e265ed142959

https://www.irs.gov/newsroom/estate-and-gift-tax-faqs

https://www.irs.gov/newsroom/treasury-irs-making-large-gifts-now-wont-harm-estates-after-2025

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