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Preparing for Upcoming Changes to Estate and Gift Tax Exclusions

 Posted on December 08, 2023 in Taxation Law

San Jose Tax AttorneyFor people who earn large incomes or own valuable assets, taxes can be a significant issue. Individuals and married couples with large estates may be concerned about the taxes that will apply when transferring assets to children, grandchildren, or other loved ones. While estate taxes may apply when assets are inherited by beneficiaries following a person’s death, strategies may be used to reduce the value of an estate and minimize the taxes that must be paid. However, changes to the federal estate and gift tax exclusion that will take place in the next few years may affect these strategies. An attorney with experience in tax law can provide guidance on how these changes may affect tax planning strategies.

Reduction of the Federal Estate and Gift Tax Exclusion in 2026

When Congress passed the Tax Cuts and Jobs Act of 2017, the federal estate tax exclusion was increased significantly. While the basic exclusion amount (BEA) had previously been set at $5 million (adjusted for inflation), it was doubled under the new law. In 2023, the BEA is $12.92 million. However, the increased exclusion is set to sunset after 2025. Starting on January 1, 2026, it will revert to $5.49 million.

After a person’s death, estate taxes will only apply to the amount of their estate that exceeds the BEA. To minimize estate taxes, a taxpayer may take steps to reduce the value of their estate. They can do so by gifting assets to others. The federal gift tax exemption allows a person to give a certain amount to a person without being required to pay taxes. In 2023, the gift tax exemption is $17,000, and it will be $18,000 in 2024. 

Each gift given to an individual in a specific tax year will be tax-free if it is below the gift tax exclusion amount. If gifts exceed the gift tax exclusion amount, the taxable value of these gifts may be applied to the person’s estate tax exemption. That is, they can use some of their estate tax exemption to avoid paying taxes on gifts made during their lifetime. Because of this, the BEA is sometimes known as the lifetime estate and gift tax exemption.

Because the BEA will be reduced in 2026, this raises the question of how taxes will be applied if gifts given prior to 2026 exceed the post-2026 BEA. For example, if a person has an estate valued at $10 million, and they decide to gift $9 million to a loved one in 2024, how will estate taxes apply if they die after 2026? The IRS has created a special rule that applies to pre-2026 gifts. For gifts given before the BEA is reduced in 2026, the estate tax exemption that was available in the year the gift was given will apply. Thus, the gift of $9 million will be excluded from estate taxes under the $12.92 million exemption that applied in 2024, even though the estate tax exemption may be lower in the year of the person’s death.

Based on this rule, it may be advantageous for taxpayers with large estates to make gifts in order to ensure that the pre-2026 BEA will apply. By reducing the value of their estates and using the available exemptions, they can minimize the taxes that must be paid when their assets are transferred to others either before or after their death.

Contact Our San Jose Estate Tax Planning Lawyer

The laws surrounding estate and gift taxes can be complicated, and they may change again in the future if Congress chooses to enact legislation. Understanding the best strategies to use to reduce the taxes you may be required to pay can be difficult, but with the help of a San Jose, CA tax law attorney, you can create a strategy that will help you protect your financial interests. To learn how John D. Teter Law Offices can help you address concerns related to estate and gift taxes, contact us at 408-866-1810 and arrange a consultation.

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